Table of Contents

Implicit Government Guarantees in European Financial Institutions

Lei Zhao, ICMA Centre - Henley Business School, University of Reading

The Effects of Government Intervention in Financial Market on the Real Economy

Jinfei Sheng, University of British Columbia (UBC) - Sauder School of Business

The Law and Economics of Benchmark Manipulation

Andrew Verstein, Wake Forest University School of Law

Facilitating Consumer Payment Innovation through Changes in Clearing and Settlement

Bruce J. Summers, Consultant on Money, Banking, and Payments

The Role of Capital Regulation on Bank Performance

Nesrine Ayadi, University of Sfax - Faculty of Economics and Management (FSEGS), Independent


REGULATION OF FINANCIAL INSTITUTIONS eJOURNAL

"Implicit Government Guarantees in European Financial Institutions" Free Download

LEI ZHAO, ICMA Centre - Henley Business School, University of Reading
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We exploit the price differential of CDS contracts written on debts with different seniority to measure the implicit government guarantees enjoyed by European financial institutions over the period 2005-2013. We find that the guarantee exists for both banks and insurance companies and it increases substantially during the global sub-prime crisis and peaks at an average of 89 basis points in September 2011 during the European sovereign debt crisis. Implicit support is higher for banks than insurance companies. Our analyses suggest Eurozone financial firms benefit more from implicit guarantees than their non-Eurozone counterparts within the European Union. We observe that the aggregate guarantee implicitly offered by a country’s government positively “Granger causes? the country’s default risk and decreases as the country’s credit quality deteriorates. We also find evidence that the phasing in of Basel III rules does not appear to have reduced the implicit guarantees available to major financial institutions in Europe.

"The Effects of Government Intervention in Financial Market on the Real Economy" Free Download

JINFEI SHENG, University of British Columbia (UBC) - Sauder School of Business
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This paper investigates the effects of the US government intervention -- Troubled Asset Relief Programs (TARP) -- on the real economy. Difference-in-Difference analysis indicates that banks that received TARP funds lent more to firms than Non-TARP banks did after TARP launched. Using firms borrowed from Non-TARP banks as the control group, I find that firms borrowed from TARP banks did not have more investment, employment, or R&D after TARP. Instead, these firms held more liquidity in terms of cash and working capital than did the firms in control group.

"The Law and Economics of Benchmark Manipulation" Free Download
Boston College Law Review, Vol. 56, 2015

ANDREW VERSTEIN, Wake Forest University School of Law
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Manipulation is all too common in financial markets. Reports of brazen schemes have rocked the markets for gold, aluminum, foreign currency, and interest rates, to name just a few from the last twelve months. These scandals are surprising in light of substantial scholarship that has long argued that market manipulation is impossible. Perhaps you can bid up the price of an asset by buying a large amount, but the price will fall as you try to sell it. Taking into account of your trading costs, you should not even break even. Regulation of manipulation is unnecessary since it cannot be profitable.

This Article challenges orthodox understandings of manipulation, showing that they reflect an obsolete view of markets. While manipulation skeptics discuss prices, markets focus on benchmarks of price – and so do the manipulators who prey upon them. Benchmarks such as Libor or the S&P 500 summarize market prices, and they have become essential to contemporary markets. They are written directly into industrial contracts, financial derivatives, statues, and regulations, and so their accuracy affects the economy every bit as much as the prices themselves. They are also are much easier to manipulate than underlying prices, because such benchmarks are typically derived from only a small slice of the market. For example benchmarks of exchange rates – the price of Euros and Yen – reflect only trade prices in a single venue, during a two-minute period of trading. If a manipulator can strategically position trades – placing aggressive purchases on that venue and aggressive sales elsewhere – she can bias the benchmark and therefore project influence over the market as a whole.

This theory – that market manipulation is increasingly synonymous with benchmark manipulation – has many important implications. It shows that the recent push by regulators and courts to require fraud in manipulation cases is fundamentally misguided since benchmark manipulation does not depend on anyone being "defrauded." Likewise, recent proposals to extensively regulate the creation of benchmarks are shown to misunderstand the mechanics of benchmark manipulation.

"Facilitating Consumer Payment Innovation through Changes in Clearing and Settlement" Free Download

BRUCE J. SUMMERS, Consultant on Money, Banking, and Payments
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This paper addresses concerns that the U.S. payment system is not keeping up with the rest of the digital economy in providing new methods of payment that give consumers immediate access to and use of their deposits held in accounts with banks and other deposit-taking institutions ("banks" for short). An international reference model is developed for an immediate funds transfer system that meets consumer needs in the digital economy. It is shown that despite a vision provided 35 years ago, and despite evidence of consumer demand dating back a decade or more, and notwithstanding successful commercial experience in a number of countries around the world, the U.S. payment system does not appear close to implementing immediate funds transfer capabilities. Governance issues appear to be the primary barrier to innovation in clearing and settlement that would support immediate completion of digital payments in the U.S. Four public policy recommendations are directed to the Federal Reserve, Treasury, and U.S. Congress that are action steps leading to upgraded payment services to consumers in the digital economy.

"The Role of Capital Regulation on Bank Performance" 
International Journal of Managerial and Financial Accounting, Forthcoming

NESRINE AYADI, University of Sfax - Faculty of Economics and Management (FSEGS), Independent
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In this paper we analyze the impact of capital regulation on performance and the risk-taking of thirty European banks. We used a technique of panel data over the period 2004 to 2009. Results show that capital regulation measured by the ratio capital has a negative and statistically significant risk-taking impact. In addition, regulatory pressure is negatively related to financial performance and positively to bank risk taking. As a result, a negative and statistically significant relationship was confirmed between credit risk and the return on assets. The results of this study show that both mechanisms "minimum capital requirements" and "regulatory pressure" are alternative mechanisms. These mechanisms play a major role in the banks' governance and are the key factors of their performance. Hence, equity strengthening would help solve many of the identified problems and therefore strengthen the stability of the financial system without adversely affecting the banking functioning, their value, their performance or even their shareholders.

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About this eJournal

This eJournal distributes working and accepted paper abstracts covering regulatory and legal aspects of national and international financial institutions. The eJournal welcomes research that deals with legal aspects of depository institutions including banks, credit unions, trust companies, and mortgage loan companies. Topics also include regulation of insurance companies, brokers, underwriters, and investment funds.

Editors: G. William Schwert, University of Rochester, and Rene M. Stulz, Ohio State University (OSU)

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Directors

BANKING & FINANCIAL INSTITUTIONS EJOURNALS

MICHAEL C. JENSEN
Harvard Business School, Social Science Electronic Publishing (SSEP), Inc., National Bureau of Economic Research (NBER), European Corporate Governance Institute (ECGI)
Email: mjensen@hbs.edu

Please contact us at the above addresses with your comments, questions or suggestions for FEN-Sub.

Advisory Board

Regulation of Financial Institutions eJournal

EDWARD I. ALTMAN
Max L. Heine Professor of Finance and Vice Director, New York University (NYU) - Salomon Center, Max L. Heine Professor of Finance, New York University (NYU) - Department of Finance

DENNIS R. CAPOZZA
Professor of Finance and Dykema Professor of Business Administration, University of Michigan, Stephen M. Ross School of Business

DONALD CHEW
Morgan Stanley Investment Management

JOHN DAVID CUMMINS
Joseph E. Boettner Professor, Temple University - Risk Management & Insurance & Actuarial Science, Harry J. Loman Professor Emeritus, University of Pennsylvania - Insurance & Risk Management Department

DOUGLAS W. DIAMOND
Merton H. Miller Distinguished Service Professor of Finance, University of Chicago - Booth School of Business, National Bureau of Economic Research (NBER)

EUGENE F. FAMA
Robert R. McCormick Distinguished Service Professor of Finance, University of Chicago - Finance

STEPHEN FIGLEWSKI
Professor of Finance, New York University - Stern School of Business

STUART I. GREENBAUM
Bank of America Professor of Managerial Leadership, Washington University in St. Louis - Olin Business School

MICHAEL C. JENSEN
Jesse Isidor Straus Professor of Business Administration, Emeritus, Harvard Business School, Co-Founder, Chairman, Managing Director and Integrity Officer, Social Science Electronic Publishing (SSEP), Inc., Research Associate, National Bureau of Economic Research (NBER), Fellow, European Corporate Governance Institute (ECGI)

JONATHAN M. KARPOFF
Washington Mutual Endowed Chair in Innovation Professor of Finance, University of Washington - Michael G. Foster School of Business

KENNETH LEHN
Professor of Business Administration, University of Pittsburgh - Finance Group

STANLEY R. PLISKA
University of Illinois at Chicago - Department of Finance

CHARLES I. PLOSSER
President, Federal Reserve Bank of Philadelphia, National Bureau of Economic Research (NBER)

KATHERINE SCHIPPER
Duke University - Fuqua School of Business

ALAN SCHWARTZ
Sterling Professor of Law, Yale Law School

G. WILLIAM SCHWERT
Distinguished University Professor of Finance and Statistics, University of Rochester - Simon School, National Bureau of Economic Research (NBER)

RENE M. STULZ
Everett D. Reese Chair of Banking and Monetary Economics, Ohio State University (OSU) - Department of Finance, National Bureau of Economic Research (NBER), Fellow, European Corporate Governance Institute (ECGI)

ROSS L. WATTS
Erwin H. Schell Professor of Management, Massachusetts Institute of Technology (MIT) - Sloan School of Management