A large share of dollar-denominated lending is done by non-U.S. banks, particularly European banks. We present a model in which such banks cut dollar lending more than euro lending in response to a ...shock to their credit quality. Because these banks rely on wholesale dollar funding, while raising more of their euro funding through insured retail deposits, the shock leads to a greater withdrawal of dollar funding. Banks can borrow in euros and swap into dollars to make up for the dollar shortfall, but this may lead to violations of covered interest parity when there is limited capital to take the other side of the swap trade. In this case, synthetic dollar borrowing also becomes expensive, which causes cuts in dollar lending. We test the model in the context of the Eurozone sovereign crisis, which escalated in the second half of 2011 and resulted in U.S. money market funds sharply reducing their exposure to European banks in the year that followed. During this period dollar lending by Eurozone banks fell relative to their euro lending, and firms who were more reliant on Eurozone banks before the Eurozone crisis had a more difficult time borrowing.
In this paper, I examine the effect of pension policy on the structure of financial systems around the world. In particular, I explore the hypothesis that policies that promote pension savings also ...promote the development of capital markets. I present a model that endogenizes the extent to which savings are intermediated through banks or capital markets, and derive implications for corporate finance, household finance, banking, and the size of the financial sector. I then present a number of facts that are broadly consistent with the theory and examine a variety of alternative explanations of my findings.
This article documents differences between the Q-sensitivity of investment of stand-alone firms and unrelated segments of conglomerate firms. Unrelated segments exhibit lower Q-sensitivity of ...investment than stand-alone firms. This fact is driven by unrelated segments of conglomerate firms that tend to invest less than stand-alone firms in high-Q industries. This finding is robust to matching on industry, year, size, age, and profitability. The differences are more pronounced in conglomerates in which top management has small ownership stakes, suggesting that agency problems explain the investment behavior of conglomerates.
We develop a two-tiered agency model that shows how rent-seeking behavior on the part of division managers can subvert the workings of an internal capital market. By rent-seeking, division managers ...can raise their bargaining power and extract greater overall compensation from the CEO. And because the CEO is herself an agent of outside investors, this extra compensation may take the form not of cash wages, but rather of preferential capital budgeting allocations. One interesting feature of our model is that it implies a kind of "socialism" in internal capital allocation, whereby weaker divisions get subsidized by stronger ones.
Hospitals have difficulty justifying the expense of maintaining trauma centers without strong evidence of their effectiveness. To address this gap, we examined differences in mortality between level ...1 trauma centers and hospitals without a trauma center (non-trauma centers).
Mortality outcomes were compared among patients treated in 18 hospitals with a level 1 trauma center and 51 hospitals non-trauma centers located in 14 states. Patients 18 to 84 years old with a moderate-to-severe injury were eligible. Complete data were obtained for 1104 patients who died in the hospital and 4087 patients who were discharged alive. We used propensity-score weighting to adjust for observable differences between patients treated at trauma centers and those treated at non-trauma centers.
After adjustment for differences in the case mix, the in-hospital mortality rate was significantly lower at trauma centers than at non-trauma centers (7.6 percent vs. 9.5 percent; relative risk, 0.80; 95 percent confidence interval, 0.66 to 0.98), as was the one-year mortality rate (10.4 percent vs. 13.8 percent; relative risk, 0.75; 95 percent confidence interval, 0.60 to 0.95). The effects of treatment at a trauma center varied according to the severity of injury, with evidence to suggest that differences in mortality rates were primarily confined to patients with more severe injuries.
Our findings show that the risk of death is significantly lower when care is provided in a trauma center than in a non-trauma center and argue for continued efforts at regionalization.
We develop a model of government portfolio choice in which the government chooses the scale of risky projects in the presence of market failures and tax distortions. These frictions motivate the ...government to manage social risk and fiscal risk. Social risk management favors programs that ameliorate market failures in bad times. Fiscal risk management makes unattractive programs involving large government outlays when other government programs also require large outlays. These two risk management motives often conflict. Using the model, we explore how the attractiveness of different financial stability programs varies with the government’s fiscal burden and characteristics of the economy.
Within an optimal contracting framework, we analyze the optimal number of creditors a company borrows from. We also analyze the optimal allocation of security interests among creditors and ...intercreditor voting rules that govern renegotiation of debt contracts. The key to our analysis is the idea that these aspects of the debt structure affect the outcome of debt renegotiation following a default. Debt structures that lead to inefficient renegotiation are beneficial in that they deter default, but they are also costly if default is beyond a manager's control. The optimal debt structure balances these effects. We characterize how the optimal debt structure depends on firm characteristics such as its technology, its credit rating, and the market for its assets.
U.S. money market mutual funds
(
MMFs
) are an important source of dollar funding for global financial institutions, particularly those headquartered outside the United States. MMFs proved to be a ...source of considerable instability during the financial crisis of 2007–09, resulting in extraordinary government support to help stabilize the funding of global financial institutions. In light of the problems that emerged during the crisis, a number of MMF reforms have been proposed, which are analyzed in this paper. The paper assumes that the main goal of MMF reform is safeguarding global financial stability. In light of this goal, reforms should reduce the ex ante incentives for MMFs to take excessive risk and increase the ex post resilience of MMFs to system-wide runs. The analysis suggests that requiring MMFs to have subordinated capital buffers could generate significant financial stability benefits. Subordinated capital provides MMFs with loss absorption capacity, lowering the probability that an MMF suffers losses large enough to trigger a run, and reduces incentives to take excessive risks. Other reform alternatives based on market forces, such as converting MMFs to a floating net asset value, may be less effective in protecting financial stability. The analysis sheds light on the fundamental tensions inherent in regulating the shadow banking system.
The squam lake report French, Kenneth R; Baily, Martin N; Campbell, John Y ...
2010., 20100525, 2010, 2010-05-25
eBook
In the fall of 2008, fifteen of the world's leading economists--representing the broadest spectrum of economic opinion--gathered at New Hampshire's Squam Lake. Their goal: the mapping of a long-term ...plan for financial regulation reform.
The Squam Lake Reportdistills the wealth of insights from the ongoing collaboration that began at these meetings and provides a revelatory, unified, and coherent voice for fixing our troubled and damaged financial markets. As an alternative to the patchwork solutions and ideologically charged proposals that have dominated other discussions, the Squam Lake group sets forth a clear nonpartisan plan of action to transform the regulation of financial markets--not just for the current climate--but for generations to come.
Arguing that there has been a conflict between financial institutions and society, these diverse experts present sound and transparent prescriptions to reduce this divide. They look at the critical holes in the existing regulatory framework for handling complex financial institutions, retirement savings, and credit default swaps. They offer ideas for new financial instruments designed to recapitalize banks without burdening taxpayers. To lower the risk that large banks will fail, the authors call for higher capital requirements as well as a systemic regulator who is part of the central bank. They collectively analyze where the financial system has failed, and how these weak points should be overhauled.
Combining an immense depth of academic, private sector, and public policy experience,The Squam Lake Reportcontains urgent recommendations that will positively influence everyone's financial well-being--all who care about the world's economic health need to pay attention.
This paper develops a general framework for analyzing corporate risk management policies. We begin by observing that if external sources of finance are more costly to corporations than internally ...generated funds, there will typically be a benefit to hedging: hedging adds value to the extent that it helps ensure that a corporation has sufficient internal funds available to take advantage of attractive investment opportunities. We then argue that this simple observation has wide ranging implications for the design of risk management strategies. We delineate how these strategies should depend on such factors as shocks to investment and financing opportunities. We also discuss exchange rate hedging strategies for multinationals, as well as strategies involving "nonlinear" instruments like options.
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