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.

/pdf/capital-regulation-risk-taking-and-monetary-policy-a-missing-4virgvq8ix.pdf

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

This paper applies a simple liquidity modelling framework and shows that forced asset sales (‘fire-sale’) provide an alternative theoretical support to the traditional view that bank competition can lead to financial instability. This arises from the fact that in a multi-bank economy, a bank can take advantage of other banks in fire-sale by choosing a riskier funding structure, and the incentive to do so increases as the number of banks in the economy increases. We also discuss the effectiveness of some possible policies to restrain the incentives for excessive risk-taking.

https://www.cass.city.ac.uk/__data/assets/pdf_file/0020/152147/Chan_Bank-Competition-Fire-Sale-and-Financial-Stability.pdf

Bank competition, fire-sales and financial stability

We review the legal and regulatory framework covering alternative (“peer-to-peer” or “marketplace”) lending platforms in the UK, the US, China, and more briefly other countries. The main regulatory concerns are (i) enforcing consumer credit rules for unsecured personal lending; and (ii) protection of uninformed retail investors from mis-selling and platform failure. Alternative lending was first established with little regulatory oversight, but there has been substantial reregulation—first in the US via the 2008s decision that platform investments are securities; subsequently in the UK, China, and other countries. We anticipate further reregulation to protect retail investors, limiting the funding of loans from the “crowd.” Promoting credit supply through alternative lending platforms requires also institutional investor participation and embracing the use of technology in platform regulation (“RegTech”).

Growing pains: The changing regulation of alternative lending platforms

This paper derived from a lecture give at the Sibos 2012 conference in Osaka, Japan (October 2012). Barcodes are the ubiquitous business standards used for the visual capture of information at retail point of sale and in business and healthcare supply chains. While the business and economic benefits of the barcode have been immense, its initial development and uptake was very slow. Even when checkout scanning technology became available in the early 1970s, it took another decade before barcode scanning at point of sale fully took off worldwide. Its spread into the global supply chain then took several more years. Commentators have argued that similar standardization could achieve a dramatic fall in costs and risk in financial services. But the experience of both the FIX protocol and of SWIFT messaging standards suggests several barriers to such change. These include weak private adoption incentives, especially when standardization lowers barriers to entry, the challenge of coordinating change across the industry, and an apparent cultural bias against investment that cannot be justified by an immediate impact on the bottom line.

/pdf/the-rise-and-success-of-the-barcode-some-lessons-for-1lediuz6bb.pdf

The Rise and Success of the Barcode: Some Lessons for Financial Services

This paper is an overview of how insurance instruments could be used in Indonesia to improve disaster risk finance (the arrangements for managing the financial consequences of disaster). We review the policy and research literature to describe the existing arrangements in Indonesia for preparing for and responding to disasters, including the efforts of an active Indonesian community mapping movement to fill in some of the major gaps in data that hinder the assessment of disaster risks. We argue that as a large geographically diverse middle-income country, Indonesia is well placed to employ insurance instruments for fairer and more predictable sharing of the financial burden of disasters. This could be through a combination of increased private insurance for households, firms and government agencies across the country and insurance-based arrangements for allocating government disaster relief funding and, when required for the largest high impact events, accessing international resources. This will, however, require careful implementation and a sustained effort to address gaps in data, skills and institutional capacity.

Using insurance instruments to improve disaster risk finance in Indonesia

An economic model is presented of the rise of mortgage arrears and possessions. This indicates that the normal level of possessions is around 30 000 dwellings per year, but that between 1990 and 1996 an additional 300 000 households will exit the owner-occupied housing market. This short-term but substantial outflow from the owner-occupied housing market is producing a mismatch between empty dwellings remaining unsold and growing queues for accommodation from local authorities and housing associations. It is argued that this mismatch is economically inefficient and that it can be addressed through an increase in government expenditure to facilitate the transfer of dwellings out of the owner-occupied housing market.

Alistair Milne

Papers

Bank competition, fire-sales and financial stability

Growing pains: The changing regulation of alternative lending platforms

The Rise and Success of the Barcode: Some Lessons for Financial Services

Using insurance instruments to improve disaster risk finance in Indonesia

Mismatch in the Housing Market