/pdf/the-theory-of-industrial-organization-19bejph0ej.pdf

The Theory of Industrial Organization

In a dynamic model of moral hazard, competition can undermine prudent bank behavior. While capital-requirement regulation can induce prudent behavior, the policy yields Pareto-inefficient outcomes. Capital requirements reduce gambling incentives by putting bank equity at risk. However, they also have a perverse effect of harming banks' franchise values, thus encouraging gambling. Pareto-efficient outcomes can be achieved by adding deposit-rate controls as a regulatory instrument, since they facilitate prudent investment by increasing franchise values. Even if deposit-rate ceilings are not binding on the equilibrium path, they may be useful in deterring gambling off the equilibrium path.

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Liberalization, Moral Hazard in Banking, and Prudential Regulation: Are Capital Requirements Enough?

At a local Best Buy, a child places a new Sony PlayStation 3 on the cashier’s counter while the parents dig out their Visa card. The gaming system and the payment card may appear to have little connection other than this purchase. However, these two items share an important characteristic that is generating a series of economic insights and has important implications for strategic decision making and economic policymaking. Both video game systems and payment cards are examples of two-sided markets. Broadly speaking, a two-sided market is one in which 1) two sets of agents interact through an intermediary or platform, and 2) the decisions of each set of agents affects the outcomes of the other set of agents, typically through an externality. In the case of a video game system, the intermediary is the console producer—Sony in the scenario above—while the two sets of agents are consumers and video game developers. Neither consumers nor game developers will be interested in the PlayStation if the other party is not. Similarly, a successful payment card requires both consumer usage and merchant acceptance, where both consumers and merchants value each others’ participation. Many more products fit into this paradigm, such as search engines, newspapers, and almost any advertisersupported media (examples in which consumers often negatively value, rather than positively value, the participation of the other side), as well as most software or title-based operating systems and consumer electronics. Malls which seek retailers and consumers, convention organizers which seek buyers and sellers, dating services which seek men and women, and The Journal of Economic Perspectives which seeks content and readership, all experience the economics of two-sided markets. The multi-sided nature of many Internet and high-technology markets, as well as

/pdf/the-economics-of-two-sided-markets-9fq1lq9tda.pdf

The Economics of Two-Sided Markets

The recent financial crisis has highlighted the need to go beyond a purely micro approach to financial regulation and supervision. As a consequence, the number of policy speeches, research papers and conferences that discuss a macro perspective on financial regulation has grown considerably. The policy debate is focusing in particular on macroprudential tools and their usage, their relationship with monetary policy, their implementation and their effectiveness. Macroprudential policy has recently also attracted considerable attention among researchers. This paper provides an overview of research on this topic. We also identify important future research questions that emerge from both the literature and the current policy debate.

/pdf/macroprudential-policy-a-literature-review-54icqxy2zp.pdf

Macroprudential policy – a literature review

Blockchains are tamper evident and tamper resistant digital ledgers implemented in a distributed fashion (i.e., without a central repository) and usually without a central authority (i.e., a bank, company, or government). At their basic level, they enable a community of users to record transactions in a shared ledger within that community, such that under normal operation of the blockchain network no transaction can be changed once published. This document provides a high-level technical overview of blockchain technology. The purpose is to help readers understand how blockchain technology works.

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Blockchain Technology Overview

This paper estimates the relation between bank profitability and economic downturns using a theoretical model that takes into account the bank’s lending history as well as amortization and losses on outstanding loans. We focus on total bank profits and its components: net interest income, other income, and net provisioning plus other costs. Using both aggregate and individual bank panel datasets, our results confirm that pro-cyclicality of bank profits is stronger for deep recessions than during mild ones. Loan-losses are found to be the main driver of this nonlinearity. We find evidence that each percent contraction of real GDP during severe recessions leads to a 0.24 percent decrease in return on bank assets.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1948483_code1723649.pdf?abstractid=1948483&mirid=1

Bank Profitability During Recessions

In card payment systems, no-surcharge rules prohibit merchants from charging consumers extra for card payments. However, such rules are prohibited in the Netherlands. Dutch retailers are allowed to surcharge consumers for debit card use. This setting permits an empirical analysis of the impact of surcharging card payments on merchant acceptance and consumer payment choice. Based on consumer and retailer survey data, our analysis shows that surcharging steers consumers away from using debit cards towards cash. Half of the observed difference in debit card payment shares across retailers can be explained by this surcharge effect. Removing debit card surcharges may induce cost savings of more than EUR 50 million in the long run.

/pdf/incentives-at-the-counter-an-empirical-analysis-of-3qj6vgjxvr.pdf

Incentives at the counter: An empirical analysis of surcharging card payments and payment behaviour in the Netherlands

In a dynamic framework, commercial banks compete for customers by setting acceptance criteria for granting loans, while taking into account regulatory requirements. By easing its acceptance criteria a bank faces a trade-off between attracting more demand for loans, thus making higher per-period profits, and deterioration in the quality of its loan portfolio, thus tolerating a higher risk of failure. Our main results state that more stringent capital adequacy requirements lead banks to set stricter acceptance criteria, and that increased competition in the banking industry leads to riskier bank behaviour. It is shown that risk-adjusted regulation is effective. In an extension of our basic model, we show that it may be beneficial for a bank to hold more equity than prescribed by the regulator, even though issuing equity is more expensive than attracting deposits.

/pdf/banking-competition-risk-and-regulation-2vfwloaz39.pdf

Banking Competition, Risk and Regulation*

Bitcoin and Cryptocurrency Technologies : A Comprehensive Introduction

This paper contributes to the literature on the relation between bank profitability and economic activity. When allowing for stronger co-movement of bank profit with economic activity during deep recessions, we find a much larger impact of output growth on bank profitability than commonly found in the literature. Among the different components of bank profit, loan losses are the main driver of this result. We also find long-term interest rates in previous years to be important determinants of bank profit in times of high economic growth. Our findings are robust to the use of aggregate or individual bank data.

Wilko Bolt

Papers

Bank Profitability During Recessions

Incentives at the counter: An empirical analysis of surcharging card payments and payment behaviour in the Netherlands

Banking Competition, Risk and Regulation*

Bitcoin and Cryptocurrency Technologies : A Comprehensive Introduction

Bank profitability during recessions