Optimal Credit Rationing in Not-For-Profit Financial Institutions

We examine the dynamic optimization problem for not-for-profit financial institutions (NFPs) that maximize consumer surplus, not profits. We characterize the optimal dynamic policy and find that it involves credit rationing. Interest rates set by mature NFPs will typically be more favorable to customers than market rates, as any surplus is distributed in the form of interest rate subsidies, with credit rationing being required to prevent these subsidies from distorting loan volumes from their optimal levels. Rationing overcomes a fundamental problem in NFPs; it allows them to distribute the surplus without distorting the volume of activity from the efficient level.

Global Systemic Risk and International Regulatory Coordination: Squaring Sovereignty and Financial Stability

In recent years much attention has been given to systemic risk and maintaining financial stability. Much of the focus, rightly, has been on market failures and the role of regulation in addressing them. This article looks at the role of domestic policies and government actions as sources of global instability. The global financial system is built upon global markets controlled by national financial and macroeconomic policies. In this context, regulatory asymmetries, diverging policy preferences, and government failures add a further dimension to global systemic risk not present at the national level.
Systemic risk is a result of the interplay between two independent variables: an underlying trigger event, in this analysis a domestic policy measure, and a transmission channel. The solution to systemic risk requires tackling one of these variables. In a domestic setting, the centralization of regulatory power into one single authority makes it easier to balance the delicate equilibrium between enhancing efficiency and reducing instability. However, in a global financial system in which national financial policies serve to maximize economic welfare, regulators will be confronted with difficult policy and legal tradeoffs.
We investigate the role that financial regulation plays in addressing domestic policy failures and in controlling the danger of global financial interdependence. To do so we analyse global financial interconnectedness, and explain its role in transmitting instability; we investigate the political economy dynamics at the origin of regulatory asymmetries and government failures; and we discuss the limits of regulation.

Information Disclosure, Market Discipline and the Management of Bank Capital: Evidence from the Chinese Financial Sector

Is there evidence that market forces effectively discipline risk management behaviour within Chinese financial institutions? This study analyses information from a comprehensive sample of Chinese banks over the 1998-2008 period. Market discipline is captured through the impact of four sets of factors namely, market concentration, interbank deposits, information disclosure, and ownership structure. We find some evidence of a market disciplining effect in that: (i) higher (lower) levels of market concentration lead banks to operate with a lower (higher) capital buffer; (ii) joint-equity banks that disclose more information to the public maintain larger capital ratios; (iii) full state ownership reduces the sensitivity of changes in a bank's capital buffer to its level of risk;(iv) banks that release more transparent financial information hold more capital against their non-performing loans. © 2010 Springer Science+Business Media, LLC.

China's Sovereign Wealth Funds: Problem or Panacea?

China’s impressive economic growth has led to the accumulation of massive financial assets. The emergence of sovereign wealth funds (SWFs), as a governmental investment device for its excessive foreign reserves, symbolizes a major rebalancing of economic power. With its investment portfolios drastically diversified for well-established financial institutions as well as some strategic sectors, a seminal debate seems centered on whether China’s SWFs are in furtherance of purely commercial or geopolitically strategic purposes. Under the sophisticated hard laws associated with international initiatives, it is unlikely that the SWFs-related investment would distort the global financial system, and genuinely threaten national security, which assumption may only exist at a hypothetical level. The potential protectionism would inevitably retard the world economy’s recovery, were it not to be proportionately addressed. A most significant necessity appears to be to strike a proportionate balance between sustaining the credibility of open investment environment and efficiently minimizing implications of SWFs political arenas.