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Showing papers in "Journal of Financial Economic Policy in 2013"


Journal ArticleDOI
TL;DR: In this article, the authors discuss and provide new data and measures of bank regulatory and supervisory policies in 180 countries from 1999 to 2011, and find that there has not been a convergence in bank regulatory regimes over the past decade despite the worst global financial crisis since the Great Depression.
Abstract: Purpose – The purpose of this paper is to discuss and provide new data and measures of bank regulatory and supervisory policies in 180 countries from 1999 to 2011.Design/methodology/approach – The authors' approach is based upon the quantification of hundreds of questions, including information on permissible bank activities, capital requirements, the powers of official supervisory agencies, information disclosure requirements, external governance mechanisms, deposit insurance, barriers to entry, and loan provisioning, to form indices of key bank regulatory and supervisory policies.Findings – It is found that the regulation and supervision of banks varies widely across countries in many different dimensions. Furthermore, there has not been a convergence in bank regulatory regimes over the past decade despite the worst global financial crisis since the Great Depression.Research limitations/implications – The data are based on survey responses and this requires that the answers be accurate. To better ensure...

391 citations


Journal ArticleDOI
TL;DR: In this paper, the authors examined the status of financial inclusion in India and study its determinants using panel fixed effects and dynamic panel generalized methods of moments (GMM) methodologies.
Abstract: Purpose – The objective of paper is to examine status of financial inclusion in India and study its determinants.Design/methodology/approach – Panel fixed effects and dynamic panel generalized methods of moments (GMM) methodologies have been applied to study determinants of financial inclusion. Additionally, Kendall's index of rank concordance has been derived to test for convergence of states in achieving financial inclusion.Findings – Branch network has unambiguous beneficial impact on financial inclusion. Both proportion of factories and employee base turn out to be significant determinants of penetration indicators. The findings reveal the importance of a region's socio‐economic and environmental setup in shaping banking habit of masses. Using test for convergence it is found that regions tend to maintain their respective level of banking activity, with no support for closing gap.Originality/value – To the best of the author's knowledge, no panel data study has been performed for India based on data f...

157 citations


Journal ArticleDOI
TL;DR: In this paper, the authors examined the impact of charter type (national vs state), holding company structure, and measures of bank fragility on the likelihood of bank failure during the late 2000s financial crisis.
Abstract: Purpose – This paper aims to examine the impact of charter type (national vs state), holding company structure, and measures of bank fragility on the likelihood of bank failure during the late 2000s financial crisis.Design/methodology/approach – The study estimates a series of logit regressions in an effort to identify the causes of failure and assess the role of the bank‐level characteristics while controlling for the economic and regulatory environment.Findings – The empirical results indicate that established institutions were more likely to fail, dependent upon whether a bank received bailout funds or not, if they were relatively large, had relatively low capital ratios, had relatively low liquidity, relied more heavily on brokered deposits, held a relatively large portfolio of real estate loans, had a relatively large proportion of non performing loans, and had less income diversity. Consistent with being financially fragile, de novo banks and those banks that grew substantially prior to the crisis f...

62 citations


Journal ArticleDOI
TL;DR: In this paper, the authors assess these disequilibria within the CEMAC, UEMOA and CFA zones and provide the speed of convergence and time required to achieve a 100% convergence.
Abstract: A major lesson of the EMU crisis is that serious disequilibria result from regional monetary arrangements not designed to be robust to a variety of shocks. The purpose of this paper is to assess these disequilibria within the CEMAC, UEMOA and CFA zones. In the assessments, monetary policy targets inflation and financial dynamics of depth, efficiency, activity and size while real sector policy targets economic performance in terms of GDP growth. We also provide the speed of convergence and time required to achieve a 100% convergence. But for financial intermediary size within the CFA zone, findings for the most part support only unconditional convergence. There is no form of convergence within the CEMAC zone. The broad insignificance of conditional convergence results have substantial policy implications. Monetary and real policies which are often homogenous for member states are thwarted by heterogeneous structural and institutional characteristics which give rise to different levels and patterns of financial intermediary development. Therefore member states should work towards harmonizing cross-country differences in structural and institutional characteristics that hamper the effectiveness of monetary policies.

38 citations


Journal ArticleDOI
TL;DR: In this article, the effects of policy options in financial dynamics (of money, credit, efficiency and size) on consumer prices were examined, and the authors found that there are significant long-run equilibriums between inflation and each financial dynamic.
Abstract: Purpose – The purpose of this paper is to examine the effects of policy options in financial dynamics (of money, credit, efficiency and size) on consumer prices. Soaring food prices have marked the geopolitical landscape of African countries in the past decade.Design/methodology/approach – The sample is limited to a panel of African countries for which inflation is non‐stationary. VAR models from both error correction and Granger causality perspectives are applied. Analyses of dynamic shocks and responses are also covered and six batteries of robustness checks are applied, to ensure consistency in the results.Findings – First, it is found that there are significant long‐run equilibriums between inflation and each financial dynamic. Second, when there is a disequilibrium, while only financial depth and financial size could be significantly used to exert deflationary pressures, inflation is significant in adjusting all financial dynamics. In other words, financial depth and financial size are more significa...

33 citations


Journal ArticleDOI
TL;DR: In this article, the authors analyze whether and how "living wills" and public disclosure of such resolution plans contribute to market discipline and the effective resolution of too big and too complex to fail banks.
Abstract: Purpose – The purpose of this paper is to analyze whether and how “living wills” and public disclosure of such resolution plans contribute to market discipline and the effective resolution of too big and too complex to fail banks. Design/methodology/approach – The disorderly collapse of Lehman Brothers is analyzed. Large, systemically important banks are now required to prepare resolution plans (living wills). In the USA, parts of the living wills must be disclosed to the public. The public component is analyzed with respect to contribution to market discipline and effective resolution of banks considered too big and complex to fail. In a statistical analysis of the publicly available section of living wills, this information is contrasted with legislative requirements. Findings – The analysis of public disclosures of resolution plans shows that they are insufficient to facilitate market discipline and, in some instances, fail to enhance public understanding of the financial institution and its business. ...

27 citations


Journal ArticleDOI
TL;DR: In this article, the authors investigated empirically contagion channels of the 2007 US subprime financial crisis by employing a multivariate GARCH model for four major, international equity markets, namely the USA, EMU, China and Japan.
Abstract: Purpose – The purpose of this paper is to investigate empirically contagion channels of the 2007 US subprime financial crisis by employing a multivariate GARCH model for four major, international equity markets, namely the USA, EMU, China and Japan.Design/methodology/approach – In this study, contagion channels of the 2007 US subprime financial crisis are investigated empirically by employing a multivariate GARCH model for four major, international equity markets, namely the USA, EMU, China and Japan.Findings – There is empirical evidence of contagion in all markets with the US market through various channels, which have not been discussed in other related studies. Specifically, the empirical results suggest that Japanese and EMU markets have been directly affected from the crisis. However, while China's equity market has been mainly unaffected by the US subprime crisis, has been affected indirectly through Japan. Moreover, the Japanese equity market exhibits positive and significant spillovers effects wi...

19 citations


Journal ArticleDOI
TL;DR: In this paper, the authors examined the role of capital rules, macro variables and bank business models in determining the safety of banks as measured by the distance-to-default (DTD) with the purpose of drawing implications for regulation of bank capital and business models.
Abstract: Purpose – The study examines the roles of capital rules, macro variables and bank business models in determining the safety of banks as measured by the “distance-to-default” (DTD) with the purpose of drawing implications for regulation of bank capital and business models. Design/methodology/approach – A panel regression study using pre- and post-crisis data for 108 US and European banks is used to explore the issue empirically. A new technique is also used to back out the amount of capital banks would have needed during the crisis to keep the “DTD” in the very safe zone. Findings – The simple leverage ratio has a strong relationship with “DTD”, while the Basel ratio does not. The most important business model features are derivatives and wholesale funding, which have a strong negative relationship with “DTD”. Trading and available-for-sale securities have a positive influence. Calculations show that it is not possible for any reasonable capital rule to compensate for the risks created by business model fe...

19 citations


Journal ArticleDOI
TL;DR: In this paper, a regression analysis is employed to determine whether various measures of economic freedom contribute to state bond ratings, and the results suggest that greater economic freedom is associated with higher bond ratings.
Abstract: Purpose – The purpose of this paper is to show that state economic policies, in addition to state economic performance, impact state bond ratings.Design/methodology/approach – Using a sample of 39 states over the period 1998‐2008, regression analysis is employed to determine whether various measures of economic freedom contribute to state bond ratings.Findings – After controlling for common factors such as state per‐capita income, unemployment, the ratio of tax revenue to income, state debt as a percentage of government revenue, and public corruption, results suggest that greater economic freedom is associated with higher bond ratings. For example, a one standard deviation increase in Area 2 of the Economic Freedom of North America index (Takings and Taxation) would be associated with a 0.36 increase in Moody's bond rating for that state, which translates to approximately a $247 lower cost per million dollars of debt.Originality/value – This study contributes to the empirical state bond rating literature ...

18 citations


Journal ArticleDOI
TL;DR: In this paper, the authors examined the short-term stock market interactions between US and six major Asian markets (Hong Kong, India, Hong Kong, Singapore, South Korea and Taiwan) and also captured the market interactions during the subprime crisis.
Abstract: Purpose – The purpose of this paper is to examine the short‐term stock market interactions between US and six major Asian markets – China, India, Hong Kong, Singapore, South Korea and Taiwan. These six economies along with Japan and Australia have the largest stock exchanges in the Asia‐Pacific region. The importance of the US market to the Asian economies is the prime motivation for a quantitative assessment of its role in this region. The objective of this study is to measure the dynamic stock market interdependence of US and Asian newly industrialized economies (NIEs) (Hong Kong, Singapore, South Korea and Taiwan) and emerging market economies (EMEs) (China and India) post Asian crisis of 1997 and also to capture the market interactions during the sub‐prime crisis.Design/methodology/approach – The study has employed Granger causality tests and generalized forecast error variance decomposition (FEVD) analysis to analyze the fluctuations in and the extent of short‐term interdependence between the US and ...

18 citations


Journal ArticleDOI
TL;DR: In this article, the effects of risk premium, leverage ratio and credit risk on banks' loan supply in Sierra Leone were investigated using bank-specific fixed effects model for estimation, and the findings indicated that risk premium and the share of non-performing loans in the banks' portfolio, tier 1 capital ratio (leverage ratio) and local currency deposit levels positively and significantly affect loan supply to private sector in banks' earning assets.
Abstract: Purpose – The study aims to investigate the factors that influence banks' loan supply in Sierra Leone. More specifically, it seeks to look into the effects of risk premium, leverage ratio and credit risk on banks' loan supply in Sierra Leone.Design/methodology/approach – Using annual bank level data on an unbalanced panel of 13 commercial banks data observed over a period of ten years (2002 to 2011), the study employs time and bank‐specific fixed effects model for estimation.Findings – The findings indicate that risk premium, the share of non‐performing loans in the banks' loan portfolio, tier 1 capital ratio (leverage ratio) and local currency deposit levels positively and significantly affect the share of loan supply to the private sector in banks' earning assets. On the other hand, advances to local currency deposit ratio and bank size have significant negative effects on the share of loans in banks assets. The study also finds bank type and the growth rate of real GDP (a proxy for economic activity) t...

Journal ArticleDOI
TL;DR: In this article, the authors consider whether it is plausible to resolve troubled systemically important cross-border banks by dividing them so that the component national authorities can resolve the parts in their jurisdiction separately according to their own priorities.
Abstract: Purpose – This paper aims to consider whether it is plausible to resolve troubled systemically important cross-border banks by dividing them so that the component national authorities can resolve the parts in their jurisdiction separately according to their own priorities. Design/methodology/approach – The example of New Zealand is used. This country has chosen just such a route in its Open Bank Resolution (OBR) policy. The difficulties and advantages of this route to resolution are analyzed. Findings – The paper concludes that the New Zealand route is plausible for systemic subsidiaries, providing there is deposit insurance. The minimum cost route is likely to be one where the home authority takes responsibility for the whole group and keeps all systemic operations running. It remains to be seen what the new EU-level proposals could achieve. Research limitations/implications – OBR is as yet fortunately untried although there are some examples from a smaller scheme in Denmark. Practical implications – The...

Journal ArticleDOI
TL;DR: In this article, the authors overview the evolution of exchange rate regimes spanning 12 nations in the Latin American region over the last two decades and estimate the degrees of influence of other major currencies on each nation.
Abstract: Purpose – Exchange rate regime decisively impacts key policy objectives such as financial stability, inflation control, etc. The purpose of this paper is to overview the evolution of exchange rate regimes spanning 12 nations in the Latin American region over the last two decades and estimate the degrees of influence of other major currencies on each nation.Design/methodology/approach – Using the methodology developed by Frankel and Wei, the de facto extent of exchange rate flexibility is discerned for these nations and put into perspective with that of the IMF exchange rate regime classifications.Findings – An increase in flexibility is found from the 1990s to the 2000s, especially for inflation targeting nations. However, the results reveal these nations adopt a policy of “guarded caution” and follow more of a de facto managed floating regime that is far from pure floats. The smaller economies of the region still pursue more fixed regimes. While the results correlate, to an extent, with the IMF's classif...

Journal ArticleDOI
TL;DR: In this paper, the authors investigated whether a culture of social trust and the scope of morality have an influence on paying and repaying behavior in different European and OECD countries, and found that culture has an effect on firms' credit losses from the customers' payment defaults, on the overall riskiness of paying behavior and on the level of non-performing bank loans.
Abstract: Purpose – Paying and repaying behavior are financial functions of great interest to private financial actors and public regulators, as also to academic researchers. The purpose of the paper is to empirically analyse paying and repaying behavior by combining theoretical insights from an emerging field in economics known as “culture and finance” with ideas from the economic analysis of social capital and trust in the context of different regulatory systems.Design/methodology/approach – The present paper investigates with the help of panel data whether a culture of social trust and the scope of morality have an influence on paying and repaying behavior in different European and OECD countries.Findings – The analysis shows that culture has an effect on firms' credit losses from the customers' payment defaults, on the overall riskiness of paying behavior and on the level of non‐performing bank loans. Also the complexity of law‐based regulation has an influence on paying and repaying behavior. The analysis also...

Journal ArticleDOI
TL;DR: In this paper, the effects of the 2008 SEC shortsell moratorium on regional bank risk and return were investigated using the integrated generalized autoregressive conditional heteroskedasticity (IGARCH) method accounting for the short-sell moratorium.
Abstract: Purpose – The purpose of this paper is to investigate the effects of the 2008 SEC short‐sell moratorium on regional bank risk and return. The paper also examines the decline in “failures to deliver” securities in the wake of SEC short‐sell moratorium.Design/methodology/approach – In total, six regional bank portfolios are derived and the beta coefficients from a CAPM model are estimated using the integrated generalized autoregressive conditional heteroskedasticity (IGARCH) method accounting for the short‐sell moratorium. Data on 110 regional banks in six US regions from January 2002 to December 30, 2011 are used to estimate the model.Findings – The ban on naked short selling and the SEC short‐sell moratorium significantly increased individual bank risk for a majority of banks in six geographic regions, but also increased return in three of three regions. There was also reduced naked short selling as failures to deliver securities declined sharply after the September 2008 moratorium took effect.Originality...

Journal ArticleDOI
TL;DR: In this article, the authors analyse how the policy approach to the immediate problems in the European financial sector has long-term effects on implicit protection of banks' creditors and, thereby, on risk-taking incentives.
Abstract: Purpose – The purpose is to analyse how the policy approach to the immediate problems in the European financial sector has long-term effects on implicit protection of banks' creditors and, thereby, on risk-taking incentives. Design/methodology/approach – The near term issues in European banking are discussed within a framework for long-term reform along the lines proposed for a European banking union. Findings – The author advocates conducting a thorough stress test with potential consequences for unsecured creditors of banks proven to be insolvent. Losses may have to be imposed on these creditors, following the example of recent cases in Cyprus and in The Netherlands. Originality/value – There is widespread consensus among international policy makers that the European banking system is seriously undercapitalized. Unlike the USA, Europe failed to recapitalize its biggest banks following the financial crisis of 2007-2009. It is now urgent to start recognizing losses on balance sheets to avoid a proliferati...

Journal ArticleDOI
TL;DR: In this article, the marginal crisis risk of Woodford is compared to a number of financial fragility indicators, including asset inflation, leverage, and incentives for speculative investments for a central bank that aims to lean against the wind.
Abstract: Purpose – The purpose of this paper is to relate the marginal crisis risk of Woodford to a number of financial fragility indicators. The paper expands the interest rate gap approach by considering the capital structure of investments and systemic risk, dating back to Modigliani‐Miller. The model allows for distinct impacts from asset inflation, leverage as well as incentives for speculative investments for a central bank that aims to lean against the wind.Design/methodology/approach – Framed in terms of the housing market and household behaviour, the paper sets out an augmented loss function which takes a number of financial fragility indicators into account. By moving beyond the case where all risk increasing mechanisms are driven by external monetary policy shocks, the approach shows why a central bank should be inclined to lean against the wind even in the absence of interest rate gaps.Findings – Taking the return to equity into account, and moving beyond the case where all risk increasing mechanisms a...

Journal ArticleDOI
TL;DR: In this paper, a multivariate survey logit based on two Pew Research Center surveys that include questions on knowledge of and views on TARP was used to estimate a knowledge index of TARP that is applied to another survey to estimate the impact of knowledge on opinions of the program.
Abstract: Purpose – The purpose of this paper is to establish the consensus about the tremendous economic success of the Troubled Asset Relief Program (TARP) and explore theories of popular disapproval of TARP.Design/methodology/approach – The analytical approach in this paper is a multivariate survey logit based on two Pew Research Center surveys that include questions on knowledge of and views on TARP. One survey is used to estimate a knowledge index of TARP that is applied to another survey to estimate the impact of knowledge on opinions of TARP.Findings – The author finds that knowledge of TARP is dependent in particular on education, party affiliation, and sex. Controlling for partisan effects, views on TARP's effectiveness are distorted by limited knowledge of TARP in magnitudes that are politically significant.Practical implications – Despite the severity and dramatic spillovers associated with banking crises, decisive interventions may prove difficult to defend in retrospect in light of ignorance and an ina...

Journal ArticleDOI
TL;DR: In this paper, the authors discuss factors that affect the socially optimal jurisdiction of financial supervision in the presence of economies of scale in banking and analyze the trade-off between likelihood of "regulatory capture" of supervisors in a small jurisdictions and benefits of greater rates of financial innovation in a less-bureaucratized and more diverse supervisory organization.
Abstract: Purpose – This paper aims to discuss factors that affect the socially optimal jurisdiction of financial supervision in the presence of economies of scale in banking. Design/methodology/approach – Analysis of the trade-off between likelihood of “regulatory capture” of supervisors in a small jurisdictions and benefits of greater rates of financial innovation in a less-bureaucratized and more diverse supervisory organization. Findings – The challenge is to create a financial supervisory institution that should be powerful enough to close down even the largest financial institutions within its jurisdiction, while at the same time not becoming so large and omnipotent that it would stifle further development of firms in financial services. Research limitations/implications – Deeper understanding of minimum efficient scales in financial intermediation required, and of regulatory capture vs efficient information acquisition from regulated units. Practical implications – Basis for international (regional) cooperat...