A Market Based Solution for Fire Sales and Other Pecuniary Externalities
We show how bundling, exclusivity and additional markets internalize fire sale and other pecuniary externalities. Ex ante competition can achieve a constrained efficient allocation. The solution can be put rather simply: create segregated market exchanges which specify prices in advance and price the right to trade in these markets so that participant types pay, or are compensated, consistent with the market exchange they choose and that type’s excess demand contribution to the price in that exchange. We do not need to identify and quantify some policy intervention. With the appropriate ex ante design we can let markets solve the problem.
Consequences of Bank Loan Growth: Evidence from Asia
When an increase in bank loans does not immediately lead to a hike in non-performing loans, bank loan officers (and/or bank managers) whose compensation is based on the value/amount of loans granted have incentives to grant more loans to (potentially lower credit quality) borrowers, which should increase the banks’ profits (and their personal compensation) in the short run. Using a sample of publicly listed banks in 18 countries in Asia during the period 1990-2014, I show that banks’ loan growth rate has a negative short-run effect on their nonperforming loans and a positive short-run effect on their profitability. While the loan growth rate does not increase non-performing loans in the short run, there is some evidence to suggest that it increases non-performing loans in the long run. The results further indicate that banks’ profitability is not affected by the level of loans but by the loan growth rate.
Bank Systemic Risk and Corporate Investment
We develop a simple three-period model in which a bank’s investment is influenced by short-term financing and a probability of a financial crisis. The presence of moral hazard problems in banks and firms causes (1) banks to take on riskier loans, (2) bank systemic risk to increase, and (3) firms to invest in riskier projects. We measure “bank systemic risk” using three measures that capture (1) bank funding maturity and (2) bank asset commonality. We document that in a sample of firms in 10 emerging markets and advanced economies bank systemic risk is positively associated with the firm-level investment ratio after controlling for the country’s cross-sectional mean ratio of total loans to total assets of banks, country-level and firm-level variables until the start of the financial crisis of 2007. The effect becomes negative after 2007. We show that bank systemic risk strengthens the sensitivity of corporate investment to growth opportunities.
Capital flows and the current account: Taking financing (more) seriously
This paper questions the appropriateness of popular analytical frameworks that focus on current accounts or net capital flows as a basis for assessing the pattern of cross-border capital flows, the degree of financial integration and the vulnerability of countries to financial crises. In the process, it revisits the Lucas paradox, the Feldstein-Horioka puzzle and the notion of sudden stops. It argues that, in a world of huge and free capital flows, the centrality of current accounts in international finance, and hence in academic and policy debates, should be reconsidered.
Index-based Risk Financing and Development of Natural Disaster Insurance Programs in Developing Countries
This paper explores innovations in index-based risk transfer products (IBRTPs) as a means to address important insurance market imperfections that have precluded the emergence and sustainability of formal insurance markets in developing countries, where uninsured natural disaster risk remains a leading impediment of economic development. Using a combination of disaggregated nationwide weather, remote sensing and household livelihood data commonly available in developing countries, the paper provides analytical framework and empirical illustrations on how to design nationwide and scalable IBRTP contracts, to analyse hedging effectiveness and welfare impacts at the micro level and to explore cost effective risk-financing options. Thai rice production is used in our analysis with the goal of extending the methodology and implications so as to enhance the development of national and regional disaster risk management in Asia.
Extreme Linkages in Financial Markets: Macro Shocks and Systemic Risk
The recent IMF World Economic Outlook (2013) investigates how real and ﬁnancial shocks can cause a sharp increase in cross country output co-movements. This paper looks at the reverse issue by asking how macro regimes of extreme low and high inﬂation or productivity growth are conducive to spillover of ﬁnancial market shocks between major open economies. Using a non-parametric measure we study the largest movements in the US and German equity index returns conditional on a speciﬁc macro regime in one or both of the countries. It is known that the unconditional probability of diﬀerent stock markets crashing jointly is non-negligible, see e.g. Hartmann et al. (2004) and Poon et al. (2004). The results suggest that the factor related to real economy, i.e. industrial production growth, is a major driver behind the extreme loss linkage, but inﬂation is not. One explanation is that monetary policy shocks are absorbed by the exchange rate, whereas technology shocks do spillover.