HEC Paris

About: HEC Paris is a education organization based out in Jouy-en-Josas, France. It is known for research contribution in the topics: Investment (macroeconomics) & Market liquidity. The organization has 584 authors who have published 2756 publications receiving 104467 citations. The organization is also known as: Ecole des Hautes Etudes Commerciales & HEC School of Management Paris.

The Economics of Bank Restructuring: Understanding the Options

Abstract: Based on a simple framework, this note clarifies the economics behind bank restructuring and evaluates various restructuring options for systemically important banks. The note assumes that the government aims to reduce the probability of a bank's default and keep the burden on taxpayers at a minimum. The note also acknowledges that the design of any restructuring needs to take into consideration the payoffs and incentives for the various key stakeholders (i.e., shareholders, debt holders, and government). If debt contracts can be renegotiated easily, the probability of default can be reduced without any government involvement by a debt-for-equity swap. Such a swap, if appropriately designed, would not make equity holders or debt holders worse off. However, such restructurings are hard to pull off in practice because of the difficulty of coordinating among many stakeholders, the need for speed, and the concerns of the potential systemic impact of rewriting debt contracts. When debt contracts cannot be changed, transfers from the taxpayer are necessary. Debt holders benefit from a lower default probability. Absent government transfers, their gains imply a decrease in equity value. Shareholders will therefore oppose the restructuring unless they receive transfers from taxpayers. The required transfer amounts vary across restructuring plans. Asset sales are more costly for taxpayers than asset guarantees or recapitalizations. This is because sales are not specifically targeted to reduce the probability of default. Guarantees or recapitalizations affect default risk more directly. Transfers can also be reduced if the proceeds of new issues are used to buy back debt. Depending on the options chosen, restructuring may generate economic gains. These gains should be maximized. Separating out bad assets can help managers focus on typical bank management issues and thereby increases productivity. Because government often lacks the necessary expertise to run a bank or manage assets, it should utilize private sector expertise. Low up-front transfers can help prevent misuse of taxpayer money. Moreover, the design of bank managers' compensation should provide incentives to maximize future profits. If participation is voluntary, a restructuring plan needs to appeal to banks. Bank managers often know the quality of their assets better than the market does. This means banks looking for new financing will be perceived by the market to have more toxic assets and, as a result, face higher financing costs. Banks will therefore be reluctant to participate in a restructuring plan and demand more taxpayer transfers. A restructuring that uses hybrid instruments - such as convertible bonds or preferred shares - mitigates this problem because it does not signal that the bank is in a dire situation. In addition, asset guarantees that are well designed can be more advantageous to taxpayers than equity recapitalizations. A compulsory program, if feasible, would obviously eliminate any signaling concerns. Information problems can also be mitigated if the government gathers and publicizes accurate information on banks' assets. In summary, systemic bank restructuring should combine several elements to address multiple concerns and trade-offs on a case-by-case basis. In any plan, the costs to taxpayers and the final beneficiaries of the subsidies should be transparent. To forestall future financial crises, managers and shareholders should be held accountable and face punitive consequences. In the long run, various frictions should be reduced to make systemic bank restructuring quicker, less complex, and less costly.

Robust Markov Decision Process: Beyond Rectangularity

Abstract: Markov decision processes (MDPs) are a common approach used to model dynamic optimization problems. MDPs are specified by a set of states, actions, transition probability kernel and the rewards associated with transitions. The goal is to find a policy that maximizes the expected cumulated reward. However, in most real world problems, the model parameters are estimated from noisy observations and are uncertain. The optimal policy for the nominal parameters might be highly sensitive to even small perturbations in the parameters, leading to significantly suboptimal outcomes. To address this issue, we consider a robust approach where the uncertainty in probability transitions is modeled as an adversarial selection from an uncertainty set. Most prior works consider the case where uncertainty on transitions related to different states is uncoupled. However, the case of general uncertainty sets is known to be intractable. We consider a factor model where the transition probability is a linear function of a factor matrix that is uncertain and belongs to a factor matrix uncertainty set. It allows to model dependence between probability transitions across different states and it is significantly less conservative than prior approaches. We show that under a certain assumption, we can efficiently compute an optimal robust policy under the factor matrix uncertainty model. We show that an optimal robust policy can be chosen deterministic and in particular is an optimal policy for some transition kernel in the uncertainty set. This implies strong min-max duality. We introduce the robust counterpart of important structural results of classical MDPs and we provide a computational study to demonstrate the usefulness of our approach, where we present two examples where robustness improves the worst-case and the empirical performances while maintaining a reasonable performance on the nominal parameters.

'We are being Pilloried for Something, We Did Not Even Know We Had Done Wrong!' Quality Control and Orders of Worth in the British Audit Profession

Abstract: This paper contributes to the analysis of institutional work by looking at situations of perceived injustice that institutional change can create. To this end, the paper mobilizes the work of Boltanski and Thevenot on orders of worth to analyse the consequences for a professional body of a shift in institutional logics towards more accountability. The feeling of injustice experienced - and voiced - by some members of the largest British institute of auditors, the ICAEW, after it set up and operated a quality monitoring unit, serves to illustrate how change can turn awry when equity in a community of peers is threatened, and how institutional work can remedy such a situation by restoring a sense of worth in the community.

Belief-free equilibria in games with incomplete information

Abstract: We define belief-free equilibria in two-player games with incomplete information as sequential equilibria for which players' continuation strategies are best replies after every history, independently of their beliefs about the state of nature. We characterize a set of payoffs that includes all belief-free equilibrium payoffs. Conversely, any payoff in the interior of this set is a belief-free equilibrium payoff. The characterization is applied to the analysis of reputations.