Real estate prices and bank stability

Real estate prices can deviate from their fundamental value due to rigid supply, heterogeneity in quality, and various market imperfections, which have two contrasting effects on bank stability. Higher prices increase the value of collateral and net wealth of borrowers and thus reduce the likelihood of credit defaults. In contrast, persistent deviations from fundamentals may foster the adverse selection of increasingly risky creditors by banks seeking to expand their loan portfolios, which increases bank distress probabilities. We test these hypotheses using unique data on real estate markets and banks in Germany. House price deviations contribute to bank instability, but nominal house price developments do not. This finding corroborates the importance of deviations from the fundamental value of real estate, rather than just price levels or changes alone, when assessing bank stability.     

Standards and the regulation of environmental risk

We study regulatory design for a pollution-generating firm who is better informed than the regulator regarding pollution mitigation possibilities, and who chooses an unobservable action when employing a particular mitigation plan. We distinguish among performance, process, and design standards, and study the relative merit of each type of regulatory instrument. Relative to previous work on standards design, we emphasize technology and process verification. An optimal performance standard is relatively strict when regulator and firm preferences are congruent, but the regulator may prefer no performance standard at all if verification costs are sufficiently high. A process standard unambiguously increases expected surplus (relative to no regulation) in some environments, and otherwise improves welfare only when it is unlikely to generate a “bad” technology choice by the firm. A design standard can improve welfare if the regulator is sufficiently well informed about the technological possibilities for pollution control, but only when the firm’s private benefits from technology choice are sufficiently small.     

Industrial Policy to Develop a Multi-Firm Industry

Governments face pressure to act when coordination and learning externalities block development of otherwise-profitable industries that would produce merit goods for the domestic market. A short-term subsidy that offsets these externalities could potentially jump-start a multi-firm industry, if the subsidy induces a pioneer firm to enter and then the pioneer’s first-period output generates coordination and learning externalities. These externalities could induce subsequent entry by input suppliers and/or competitors. However, empirical evidence raises questions about the ability of governments to use short-term subsidies to jump-start new industries. We explore one explanation for the difficulty of jump-starting new industries: the subsidy could generate counter-productive incentives for the pioneer firm to prevent entry of additional firms. We model the jump-start strategy and examine whether coupling a short-term fixed subsidy with a per-unit subsidy can achieve the objective of creating a multi-firm industry.     

Slowdown of credit flows in Jordan in the wake of the global financial crisis: Supply or demand driven?

This paper estimates a disequilibrium model of credit supply and demand to evaluate the relative role of these factors in the slowdown of credit flows in the Jordanian economy in the wake of the global financial crisis. The empirical analysis suggests that the credit stagnation is mainly driven by the restricted credit supply amid tighter monetary policy conditions in Jordan relative to the United States, as evidenced by the widened interest differential between the Central Bank of Jordan (CBJ) re-discount and the U.S. Federal Reserve funds rates. Although it appears that demand side factors related to the slowdown of economic activity have also had an impact, their role has been relatively modest. The estimation results imply that economic policies targeted towards stimulating the supply of credit are likely to be a more effective tool for expanding credit flows relative to demand stimulating policies.     

Determinants of cross‐border bank acquisitions in transition economies1

We analyse the microeconomic determinants of cross‐border bank acquisitions in 11 transition economies over the period 1992–2006. We find that foreign banks target relatively large and efficient banks when they enter transition economies with weak institutions. This evidence provides support for the ‘market power’ hypothesis. However, when foreign banks enter more developed transition economies that have made progress in economic reform, they acquire less efficient banks. This result is in line with the efficiency hypothesis. We use a multilevel mixed effects logit model that allows us to explicitly incorporate the macroeconomic and institutional heterogeneity of the transition economies into our analysis.     

Financial intermediation costs in low income countries: The role of regulatory,institutional, and macroeconomic factors

We analyze factors driving persistently higher financial intermediation costs in low-income countries (LICs) relative to emerging market (EM) country comparators. Using the net interest margin as a proxy for financial intermediation costs at the bank level, we find that within LICs a substantial part of the variation in interest margins can be explained by bank-specific factors: margins tend to increase with higher riskiness of credit portfolio, lower bank capitalization (or lower risk aversion), and smaller bank size. Overall, we find that concentrated market structures and lack of competition in LICs banking systems and institutional weaknesses constitute the key impediments preventing financial intermediation costs from declining. Our results provide strong evidence that policies aimed at fostering banking competition and strengthening institutional frameworks can reduce intermediation costs in LICs.     

Heterogeneity of technological regimes and banking efficiency in former socialist economies

Cost efficiency of banks in 20 former socialist emerging economies is analyzed using a latent class stochastic efficiency frontier model that explicitly accounts for unobserved differences in technological regimes due to the heterogeneity of economic environments in which the banks are operating. We find that banking systems in former socialist emerging economies are characterized by three distinct technological regimes. Based on the estimated efficiency scores we group the countries into three categories and provide an intuitive interpretation of these three regimes.     

Size and earnings volatility of US bank holding companies

We examine whether bank earnings volatility depends on bank size. Using quarterly data for bank holding companies in the United States for the period 1995Q1–2010Q3 and controlling for the quality of management, leverage, and diversification, we find that bank size reduces return volatility. However, the effect is non-linear: when bank size exceeds a certain threshold (about US$5 billion) size is positively related to earnings volatility. The recent financial crisis decreased the threshold beyond which the impact of size on volatility turns positive.     

Will consumers accept irradiated food products?

This study examines consumers’ willingness to pay for irradiated beef products. About 58% of the respondents are willing to pay a premium for irradiated beef. An ordered probit with sample selection model was estimated. Standard errors of the marginal effects of the ordered probit model were estimated using the bootstrap method. Our findings suggest that females and those who think that improper handling contributes to food poisoning are more likely to pay a premium of 50 cents per pound for irradiated beef than others. Those who trust the irradiation technology are also more likely to pay a premium of between 5 and 25 cents per pound for irradiated beef. Supply chain implications are discussed.     

Controlling for the underreporting of remittances

Empirical studies that use self-reported data on remittances to measure the latter's impact on microeconomic incentives mostly ignore the potential errors associated with reporting/measurement issues. An econometric procedure to control for these errors is developed and applied to household level data from Armenia. We find evidence of systematic underreporting of remittances. After controlling for this, we find a strong negative impact of remittances on incentives to work.