Basel Core Principles and bank soundness: Does compliance matter?

This paper studies whether compliance with the Basel Core Principles for effective banking supervision (BCPs) is associated with bank soundness. Using data for over 3000 banks in 86 countries, we find that neither the overall index of BCP compliance nor its individual components are robustly associated with bank risk measured by individual bank Z-scores. We also fail to find a relationship between BCP compliance and systemic risk measured by a system-wide Z-score.     

The effect of traditionally marginalized groups in advertising on consumer response

Increasingly, national brands have cast people from marginalized groups in advertising. It is important to understand the elements that influence consumers’ responses to advertisements featuring groups who have been traditionally excluded from advertising campaigns. Although consumers may wish to buy brands that support their own views on human rights and equality, we propose that consumers in the target market may be uncomfortable if the group portrayal contradicts their beliefs about the topic, concept, or social groups in the ad. Across two studies, we show that when an ad creates this type of internal contradiction within consumers, it may elicit a more negative response than an ad portraying a more traditional model. However, we also find preliminary evidence that using models from marginalized groups can be more effective than using more traditional models—as long as such portrayals do not violate certain target consumers’ schemas. The implications of these results will be discussed.     

Monitoring Banking Sector Fragility: A Multivariate Logit Approach

This article explores how a multivariate logit model of theprobability of a banking crisis can be used to monitor bankingsector fragility. The proposed approach relies on readily availabledata, and the fragility assessment has a clear interpretationbased on in-sample statistics. The model has better in-sampleperformance than currently available alternatives, and the monitoringsystem can be tailored to fit the preferences of decisionmakersregarding type I and type II errors. The framework can be usefulas a preliminary screen to economize on precautionary costs.     

Positional learning with noise

We propose (and test experimentally) a model of observational learning in which players have social preferences. To this end, we design an experiment–based on a classic parlor game known as the Chinos Game–in which we vary (by way of an exogenous iid stochastic process) the probability of getting the prize in the event of a correct guess. By this design, we are able to estimate more efficiently players’ sensitivity to difference in payoffs (and how this sensitivity affects information decoding along the sequence). We also condition our estimates upon additional information on subjects’ socio-demographics, risk attitudes and cognitive reflection by way of a questionnaire that we collect at the end of each session.     

A comparison of the estimates of expected utility and non-expected-utility preference functionals

This paper extends the literature on the estimation of expected utility and non-expected-utility preference functionals (and the consequent exploration of the superiority of non-expected-utility over expected utility preference functionals) to a comparison of two different ways (pairwise choice and complete ranking) of experimentally obtaining data on such preferences. What is revealed is that the magnitude of the subject error is clearly conditional on the elicitation method used and, rather alarmingly, that the preference functional apparently employed by the subject may also be conditional on the elicitation method.     

Do technology externalities justify restrictions on emission permit trading?

International emission trading is an important flexibility mechanism, but its use has been often restricted on the ground that access to international carbon credits can undermine the domestic abatement effort reducing the incentive to innovate and, eventually, lowering the pace of climate policy-induced technological change. This paper examines the economics that is behind these concerns by studying how a cap to the trade of carbon offsets influences innovation, technological change, and welfare. By using a standard game of abatement and R&D, we investigate the main mechanisms that shape these relationships. We also use a numerical integrated assessment model that features environmental and technology externalities to quantify how limits to the volume, the timing, and the regional allocation of carbon offsets affect climate policy costs and the incentive to invest in innovation and low-carbon technologies.Results indicate that, for moderate caps on the amount tradable emissions permits and sufficiently high technology spillovers, global innovation and technical change would increase and that this additional innovative effort could lead to economic efficiency gains. The numerical analysis confirms that when constraints are close to 15% of domestic abatement, efficiency losses are small because they are partly compensated by more technological spillovers and lower energy prices. Under a broad range of parameters, restrictions are costly for the constrained countries, but always beneficial for unconstrained ones.     

Banking on the principles: Compliance with Basel Core Principles and bank soundness

This study finds that banks receive more favorable Moody's financial strength ratings in countries with better compliance with Basel Core Principles related to information provision. The results are robust to controlling for broad indexes of institutional quality, macroeconomic variables, sovereign ratings, and reverse causality. Compliance with other Core Principles does not affect ratings robustly. Measuring bank soundness through Z-scores yields broadly similar results for advanced and emerging markets. Countries aiming to upgrade banking regulation and supervision should consider giving priority to information provision over other elements of the core principles.     

Multiple versus Single Banking Relationships: Theory and Evidence

A theory of the optimal number of banking relationships is developed and tested using matched bank-firm data. According to the theory, relationship banks may be unable to continue funding profitable projects owing to internal problems and a firm may thus have to refinance from nonrelationship banks. The latter, however, face an adverse selection problem, as they do not know the quality of the project, and may refuse to lend. In these circumstances, multiple banking can reduce the probability of an early liquidation of the project. The empirical evidence supports the predictions of the model.     

Bank Fragility and International Capital Mobility

The paper presents a model of a small open economy with a fragile banking sector and imperfect international capital mobility. In this model, increased international integration of the market for bank deposits makes bank runs more likely, resulting in a welfare loss for the business sector. Bank depositors may gain or lose depending on the parameters. When depositors gain, whether the gains exceed the losses to the business sector depends on the size of the holdings of foreign assets relative to the deadweight costs of bank runs. Thus, limited international financial integration may not be desirable.