On the Coexistence of Banks and Markets*

We examine the coexistence of banks and financial markets by studying a credit market where the qualities of investment projects are not observable and the investment decisions of entrepreneurs are not contractible. Standard banks can alleviate moral‐hazard problems, while financial markets operated by investment banks can alleviate adverse‐selection problems. In competition, standard banks are forced to increase repayments, since financial markets can attract the highest‐quality borrowers. This, in turn, increases the share of shirkers and may make lending unprofitable for standard banks. The coexistence of financial markets and standard banks is socially inefficient. The same inefficiency may occur with the entrance of sophisticated banks, operating with a combination of rating and ongoing monitoring technologies.     

Measuring the degree of competition in Pakistan’s banking industry: an empirical analysis

Pakistan’s banking industry has gone through significant transformation from being in a heavily state regulated and controlled environment to a more liberalized market structure in recent years. This liberalization of banking industry in Pakistan has raised concerns over the dominant banks’ exercise of market power on account of increase in market concentration due to mergers and acquisitions, high profitability in banking sector and increasing interest rate spread. Present study therefore explicitly tests the market conduct of banks using quarterly panel data of 30 banks from 2004 to 2012 and employing Panzar–Rosse, Bresnahan–Lau, Hall–Roeger and Boone’s approaches to study market power. Our findings suggest that Pakistan’s banking industry is working in a competitive environment and we find little evidence for the exercise of market power by the dominant banks. Our results remain robust across all these approaches to measure market power. These findings indicate that the liberalization and deregulation of Pakistan’s banking industry has been successful in improving the competitive conditions in the market.     

Evaluation of investment subsidies: when is deadweight zero?

In the evaluation of investment subsidies one of the critical issues concerns the assessment of deadweight, that is, the degree to which projects would have been carried out without grant assistance. With the increasing restrictions on and cuts in subsidies for investment projects in the EU countries maximisation of the impact of the public resources that remain can be achieved through their allocation for projects with minimum deadweight. This paper studies the profile of subsidised zero deadweight investment projects – projects that would be abandoned without public subsidies – in Finland. The empirical analysis is conducted using micro level data on investment projects by private sector firms. The data set comprises 3,423 projects that were granted public investment subsidies between 2001 and 2003. Our results show that the likelihood of zero deadweight is significantly dependent on the characteristics of the subsidised firm, the characteristics of the investment project and the location of the subsidised firm.     

INFRASTRUCTURE INVESTMENT – THE EMERGENT PPP EQUITY MARKET

Increasingly governments are looking to private sector actors to invest in infrastructure projects. An emergent mechanism for such investment is the market in PPP equity. This is an aspect of PPPs that has to date had little empirical attention. This paper reports on the size and scope of the market in PPP equity sales within the UK. In the process, the nature of PPP projects and the existing rationales for the policy are critiqued. The paper concludes by laying out a number of potential research agendas focused on PPP equity sales including a call for reassessing theoretical perspectives.     

Optimal Climate Change Policies When Governments Cannot Commit

We analyse the optimal design of climate change policies when a government wants to encourage the private sector to undertake significant immediate investment in developing cleaner technologies, but the relevant carbon taxes (or other environmental policies) that would incentivise such investment by firms will be set in the future. We assume that the current government cannot commit to long-term carbon taxes, and so both it and the private sector face the possibility that the government in power in the future may give different (relative) weight to environmental damage costs. We show that this lack of commitment has a significant asymmetric effect: it increases the social benefits of the current government to have the investment undertaken, but reduces the private benefit to the private sector to invest. Consequently the current government may need to use additional policy instruments—such as R&D subsidies—to stimulate the required investment.     

论我国私人银行业务的发展——基于目标客户的探讨

作为专门向富有阶层提供的个人财产投资与管理服务,私人银行业务现已成为当今国际发达国家商业银行的战略核心业务之一。根据官方和私人机构的评估,中国私人财富市场潜力巨大,在金融危机背景下依然保持较为稳定的增长势头。但处在初级阶段的中国私人银行业务很难满足国内富裕家庭的需求。文章侧重于从目标客户的角度探讨中资私人银行的发展。     

Misled and mis-sold: financial misbehaviour in retail banks?

We use an audit methodology where auditors ask for tax saving instruments from banks and document the disclosures made on product features at the time of sale. In private sector banks with high sales incentives, the high commission product is recommended. In public sector banks, where there are deposit mobilisation targets, fixed deposits are recommended. Banks rarely make voluntary disclosures on product features. When specifically requested, information provided is inaccurate or incomplete. Our results demonstrate the challenges of mandating disclosures when buyers have little understanding of the relevance of product characteristics, and distributors are themselves ignorant or influenced by incentives. They also raise concerns regarding private sector banking without regulatory capacity.     

论民营银行市场准入压抑问题

在经济转轨时期,我国金融领域存在着明显的民营银行市场准入压抑问题。民营银行市场准入压抑的形成机理在于:决策层顾虑发展民营银行会削弱国家对金融资源的控制,降低金融宏观调控效果,影响国有企业改革等。然而,随着经济和金融环境的变化,尤其是民营经济的快速发展,民营银行市场准入压抑催生的金融问题日益凸现。在国家综合经济实力的增强,金融调控和监管机制的不断完善的条件下,逐步解除民营银行市场准入压抑,应成为深化金融体制改革的理性选择。     

Explaining foreign bank entrance in emerging markets

This paper provides a theoretical framework that can explain the empirical observation that foreign banks from industrialized countries tend to increase their involvement in emerging markets in periods of market instability. In this model, domestic banks have (through past lending operations) more soft information on their borrowers available compared to foreign banks. Foreign banks, however, have a superior screening technology that allows them to obtain more hard information about their borrowers’ investment projects. The model has an important implication: Foreign banks increase their market share when credit market conditions deteriorate. The rationale for this finding is that the comparative advantage of the domestic bank loses value in unstable credit market conditions. Thus, the advantage of having a screening technology becomes more important and allows the foreign bank to increase market share. In times of crisis hard information on projects is relatively more important than soft information on the borrower’s history.     

Business fixed investment of Chinese manufacturing firms in the post-financial crisis era

ABSTRACT

I document the investment decline of Chinese manufacturing firms after 2011, following the end of the 4 trillion fiscal stimulus program and expansionary monetary policies for combating the 2008–2009 financial crisis. I employ a difference-in-difference strategy to show that state-owned enterprises (SOEs) acted as investment stabilizers. In the post-crisis era, SOEs’ investment rates fell less compared to their private counterparts. Moreover, they had a smaller chance of exiting the market than private firms. In the face of monetary tightening, SOEs enjoyed a much smaller increase in the interest rates of their long-term debts. Although these may fuel the growth of the SOE sector relative to the private sector, and thus raised concerns for capital misallocation, the adverse effect on reallocation was dampened by shadow banking.     

The First Wave of Mass Privatization in Bulgaria and its Immediate Aftermath

In January 1995, a Socialist government came to power in Bulgaria and initiated a mass privatization programme. In the first wave of this programme, which was completed in June 1997, about one-fourth of Bulgaria's state-owned enterprises were partially privatized through the programme. Patterned after the Czech mass privatization programme, an important outcome of the Bulgarian programme is that investment funds have become important agents in the private sector of the economy. It is too early to determine whether enterprise restructuring will now occur, but initial market signals suggest that Bulgaria may soon suffer from many problems that now confront the Czech economy unless new corporate laws supporting ownership rights and better capital market regulations are enacted.     

The Impact of Foreign Entry on Chinese Banks

Utilizing hand collected data concerning foreign ownership in the Chinese banking sector, we examine whether foreign ownership improves the efficiency of Chinese banks. Foreign banks tend to provide cooperation in retail banking rather than in corporate or private banking. We find no robust evidence of an improvement in the efficiency of an average bank that receives foreign strategic investments. However, the bank cost and profit efficiency significantly improve when foreign strategic investments provide retail banking and internal control assistance respectively to local banks. These findings suggest that foreign investment improves local bank efficiency when it transfers technologies that are lacking in local banks.     

建设项目需求分析与投资决策规则选择

中国是世界上最大的建筑市场,其中因投资决策失误而导致的项目失败案例频频出现.究其原因,人们在投资建设项目时更多地关注于建设项目的供给方面,对需求的关注甚少.因而,在对建设项目投资决策进行分析时,首先有必要针对需求选择正确的资源配置规则.在效率目标下,民间投资应遵循价格信号和利润主导的经济规则.在公平目标下,政府投资应遵循国民经济主导的行政规则,为保证公众需求的实现,公众的正式或非正式的过程性参与是有效机制,另外还应在需求之外结合社会规则,实现市场、国民与社会的可持续发展.     

Why do Banks Fail?

Banks advance loans in the absence of precise knowledge in relation to the outcome of borrowers' projects. Consequently, uncertainty in relation to loan repayment emerges. Thus, banks introduce the 'credit standard' as insurance against loans, so that should borrowers' projects fail, borrowers have an alternative means of honouring their debt obligations. It is argued in this paper that in the competitive atmosphere under which this sector operates, it is not possible to secure the entire loan portfolio by introducing the credit standard, and in recent years this difficulty has been further exacerbated by financial liberalisation, which may have caused bank failures.     

Bank capital requirements and mandatory deferral of compensation

We analyze the interplay of capital requirements and mandatory deferral of compensation in reducing banks’ risk taking incentives. Two heterogenous banks fund uncorrelated projects with fully diversifiable risk or correlated projects with systematic risk. One of both banks can identify project types and is superior at managing risks. If projects are in abundant supply, full mandatory deferral of compensation is optimal as it allows a larger banking sector without increasing the default risk. With limited supply of projects, deferred compensation may misallocate risky projects to the bank that is inferior at managing risks, so that early compensation may be optimal.     

Convergence of bank competition in Central and Eastern European countries: do foreign and domestic banks go hand in hand?

Following the massive entry of foreign banks into the Central and Eastern European (CEE) banking markets, one may wonder whether their competitive behaviour differs from that of their domestic counterparts, possibly leading to the segmentation of these markets at the regional and national levels. We find that the competitive behaviour of foreign and domestic banks differs, with foreign banks having less market power until the recent financial crisis and more market power after this financial turmoil. Despite this difference, banks tend to behave similarly, and their market power converges to a similar level. The tendency towards similar competitive behaviour is observed at the regional and national levels and for both foreign and domestic banks, although foreign institutions that enter these markets through the acquisition of domestic banks have slightly more market power. Our findings suggest the regional integration of CEE banking markets and no segmentation between foreign and domestic institutions.     

Modelling price competition across many markets (An application to the Spanish loans market)

The purpose of this work is the structural modelling of price competition in a product-differentiated industry in which many firms of varying size compete across many independent small markets, with the target of identifying price behaviour. We apply it to model competition among the more than 79 banks that were active in the Spanish loans market during the period 1983-1991, using micropanel data. A model in which national banks (as opposed to regional and local banks) fully internalize their cross-rate effects in pricing is selected as the model that best fits the data. Our framework allows us to estimate the dead-weight loss due to market power, and to decompose it assessing the part attributable to price coordination.     

The Wicksell-Tobin investment model

We formalize in this paper Wicksell's investment decision model and compare it with Tobin's q-theory. Wicksell's firms either compare the natural rate of interest with the prevailing market interest rate or the capital values with the replacement costs of investment projects. This exposition of Wicksell's approach reveals some striking similarities with Tobin's supply-price-of-capital model, which relates the marginal efficiency of capital to the rate of return required by portfolio investors in the well-known q-ratio. The ratio market value to replacement cost of capital should, therefore, more appropriately be termed the Wicksell-Tobin q. Our formalization of Wicksell's investment theory appears to open up a promising new avenue for further research in cases where banks provide the source of funds.     

How significant is the alleged unfair advantage enjoyed by state-owned banks in Germany?

The European Commission argues that the state-owned banks inGermany enjoy an unfair advantage over the private sector banksin the cost of borrowing funds in the financial markets becauseof state guarantees that public sector banks are perceived toenjoy. This note demonstrates that the blame for the comparativelypoor profitability of private sector banks in Germany cannotbe laid at the door of the relatively cheaper funds that thepublic sector banks can raise in the wholesale markets.     

Second best welfare economics in the mixed economy

The general problem of measuring welfare for large government projects is considered in a context where the government may interfere with the private market sector in a variety of ways. Measures are decomposed into a pure efficiency part and a pure equity part and it is shown that the efficiency part is measured by integrals under ‘uncompensated’ market demand functions. It is also shown that the efficiency part may be further decomposed into second best contributions due to commodity taxation, monopoly power and quantity constraints.