We examine the determinants and implications of holdings of cash and marketable" securities by publicly traded U.S. firms in the 1971-1994 period. Firms with strong growth" opportunities and riskier cash flows hold relatively high ratios of cash to total assets. Firms" that have the greatest access to the capital markets (e.g. large firms and those with credit" ratings) tend to hold lower ratios of cash to total assets. These results are consistent with the" view that firms hold liquid assets to ensure that they will be able to keep investing when cash" flow is too low relative to planned investment and when outside funds are expensive. The" short run impact of excess cash on capital expenditures, acquisition spending and payouts to" shareholders is small. The main reason that firms experience large changes in excess cash is" the occurrence of operating losses. There is no evidence that risk management and cash" holdings are substitutes.

The Determinants and Implications of Corporate Cash Holdings

The East Asian miracle: Economic growth and public policy: By the World Bank. (New York: Oxford University Press for the World Bank, 1993. 389 pp. $19.95, paper.)

The theory of precautionary saving is shown in this paper to be isomorphic to the Arrow-Pratt theory of risk aversion, making possible the application of a large body of knowledge about risk aversion to precautionary saving, and more generally, to the theory of optimal choice under risk In particular, a measure of the strength of precautionary saving motive analogous to the Arrow-Pratt measure of risk aversion is used to establish a number of new propositions about precautionary saving, and to give a new interpretation of the Oreze-Modigliani substitution effect

Precautionary Saving in the Small and in the Large

Few areas of monetary economics have been studied as extensively as the transmission mechanism. The literature on this topic has evolved substantially over the years, following the waxing and waning of conceptual frameworks and the changing characteristics of the financial system. In this paper, taking as a starting point a brief overview of the extant work on the interaction between capital regulation, the business cycle and the transmission mechanism, we offer some broader reflections on the characteristics of the transmission mechanism in light of the evolution of the financial system. We argue that insufficient attention has so far been paid to the link between monetary policy and the perception and pricing of risk by economic agents - what might be termed the "risk-taking channel" of monetary policy. We develop the concept, compare it with current views of the transmission mechanism, explore its mutually reinforcing link with "liquidity" and analyse its interaction with monetary policy reaction functions. We argue that changes in the financial system and prudential regulation may have increased the importance of the risk-taking channel and that prevailing macroeconomic paradigms and associated models are not well suited to capturing it, thereby also reducing their effectiveness as guides to monetary policy.

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Capital Regulation, Risk-Taking and Monetary Policy: A Missing Link in the Transmission Mechanism?

13 EADERS of Mr. Bertrand Russell's philosophical £v works know that one of his pupils before the outbreak of the war, an Austrian, Mr. Ludwig Wittgenstein, caused him to change his views in some important particulars. Curiosity can now be satisfied. The “Tractatus Logico-Philosophicus “which Mr. Ogden has included in his new library of philosophy is a remarkable and strikingly original work. It is published in German and English in parallel pages. It is difficult to appreciate the reason for this, seeing that the author is evidently familiar with our language and has himself carefully revised the proofs of the translation. Also we should have liked to have the Tractatus without Mr. Russell's Introduction, not, we hasten to add, on account of any fault or shortcoming in that introduction, which is highly appreciative and in part a defence of himself, in part explanatory of the author, but for the reason that good wine needs no bush and that Mr. Russell's bush has the unfortunate effect of dulling the palate instead of whetting the appetite. In his penultimate sentence Mr. Russell says; “To have constructed a theory of logic which is not at any point obviously wrong is to have achieved a work of extraordinary difficulty and importance.” We agree, but how uninspiring when compared with Mr. Wittgenstein's own statement of aim: “What can be said at all can be said clearly, and whereof one cannot speak, thereof one must be silent.” Tractatus Logico-Philosophicus. By Ludwig Wittgenstein. (International Library of Psychology, Philosophy and Scientific Method.) Pp. 189. (London: Kegan Paul and Co., Ltd.; New York: Harcourt, Brace and Co., Inc., 1922.) 10s. 6d. net.

Tractatus Logico-Philosophicus

New financial technologies (FinTech) have erupted around the world. Consequently, there has been a considerable increase in academic literature on FinTech over the last five years. Research tends to be scantily connected with no coherent research agenda. Signi - cant research gaps and important questions remain. There is much work to be done before this area becomes an established academic discipline. This paper offers coherent research themes formulated through focus group meetings with policymakers and academics, and also based on a critical assessment of the literature. We outline seven key research gaps with questions that could form the basis of academic study. If these are addressed it would help this area become an established academic discipline.

Fintech and the future of financial services: What are the research gaps?

The increasing capabilities of artificial intelligence (AI) are changing the way organizations operate and interact with users both internally and externally. The insurance sector is currently using AI in several ways but its potential to disrupt insurance is not clear. This research evaluated the implementation of AI-led automation in 20 insurance companies. The findings indicate four business models (BM) emerging: In the first model the insurer takes a smaller part of the value chain allowing others with superior AI and data to take a larger part. In the second model the insurer keeps the same model and value chain but uses AI to improve effectiveness. In the third model the insurer adapts their model to fully utilize AI and seek new sources of data and customers. Lastly in the fourth model a technology focused company uses their existing AI prowess, superior data and extensive customer base, and adds insurance provision.

Evaluating the impact of AI on insurance: The four emerging AI- and data-driven business models

This paper reviews the development and assesses the future of peer-to-peer (P2P) lending in China. Chinese P2P lending has expanded by a factor of 60 over the 4 years from 2013 to 2017. Consequently, it is now much greater, both in absolute terms and relative to the size of the economy, than in any other country. The industry though has been plagued by problematic often fraudulent business models in what was, until 2015, effectively a regulatory vacuum. A strict new regulatory regime is currently being introduced. However, the introduction of the strict new regulatory regime, especially the requirements on capital and registration are substantially reducing the volume of P2P lending. We consider the future of P2P lending concluding it is facing substantial uncertainties.

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PS14 Lessons from the rise and fall of Chinese peer-to-peer lending

The COVID-19 pandemic is a major economic shock. With no comparable event having occurred since the 1918 Spanish Flu, and a rapidly changing public health situation, economic policy makers are largely having to improvise their responses. This note assesses the scale of this large shock, suggesting that it is about 10% of global GDP so around five times as large as the credit and liquidity problems that created the global financial crisis of 2007-2008. It then examines the economic policy response, suggesting that to be as effective as possible the response must address two distinct objectives: offset the deflationary economic shock and provide targeted support to those most directly affected. It proposes a surprisingly inexpensive framework – “retrospective insurance” at a net additional cost only 2% of GDP – that can guide the allocation of public resources to ensure no business goes under as a result of the pandemic and all who merit protection get support.

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A Critical COVID-19 Economic Policy Tool: Retrospective Insurance

We calibrate a simulation model of credit value-at-risk for mortgage lending to UK experience. Simulations to capture the skewness of returns that might arise in the context of a financial crisis suggest that the IRB calculations of the new Basel Accord can substantially understate prudential capital adequacy. The same model shows that raising capital requirements has only a small impact on bank funding costs. We conclude that Pillar 2 supervisory review should increase capital requirements above IRB levels for secured bank assets—those whose returns can potentially fall furthest, relative to other, normally “riskier” assets, in extreme outcomes.

Alistair Milne

Papers

Fintech and the future of financial services: What are the research gaps?

Evaluating the impact of AI on insurance: The four emerging AI- and data-driven business models

PS14 Lessons from the rise and fall of Chinese peer-to-peer lending

A Critical COVID-19 Economic Policy Tool: Retrospective Insurance

Skewness of Returns, Capital Adequacy, and Mortgage Lending*