Table of Contents

A Tale of Two Vintages: Credit Limit Management Before and After the CARD Act and Great Recession

Larry Santucci, Federal Reserve Bank of Philadelphia

Centrality-Based Capital Allocations

Adrian Alter, International Monetary Fund
Ben R. Craig, Federal Reserve Bank of Cleveland
Peter Raupach, Deutsche Bundesbank - Research Department

Acquiring Access to Finance

Jess Cornaggia, Georgetown University
Jay Y. Li, City University of Hong Kong

Absence of Interbank Loan Market and Banking Short-Term Liquidity Management Mechanisms: The Most Pressing Problems of the Islamic Finance Model

Magomet Yandiev, Moscow State University - Faculty of Economics, Russian Presidential Academy of National Economy and Public Administration (RANEPA)

GAAP Difference or Accounting Fraud? Evidence from Chinese Reverse Mergers Delisted from U.S. Markets

Yimiao Chen, KPMG
Gang Hu, Hong Kong Polytechnic University - School of Accounting and Finance
Ling Lin, University of Massachusetts Dartmouth - Department of Accounting & Finance
Min Xiao, Xiamen University - Department of Finance

The Implicit Costs of Government Deposit Insurance

Thomas L. Hogan, Troy University
William J. Luther, Kenyon College

Recapitalizing the Greek Banks: An Empirical Study. Purposes, Implications & Critical Discussion

Georgios Loukas Vousinas, National Technical University of Athens


REGULATION OF FINANCIAL INSTITUTIONS eJOURNAL

"A Tale of Two Vintages: Credit Limit Management Before and After the CARD Act and Great Recession" Free Download
FRB of Philadelphia - Payment Cards Center Discussion Paper No. 15-01

LARRY SANTUCCI, Federal Reserve Bank of Philadelphia
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This paper uses tradeline-level credit card data to examine initial credit limits and early credit limit increases before and after the Great Recession and implementation of the Credit Card Accountability, Responsibility, and Disclosure Act of 2009 (the CARD Act). I compare two vintages of credit card accounts, those opened in 2005 and 2011; I also follow each vintage for more than two years after the account opening. In general, I find that significantly less credit was extended to approved credit card applicants in 2011 than in 2005. Accounts in the 2011 vintage started out with lower initial credit limits, received fewer limit increases, and received a smaller increase amount in dollar terms. These changes were most pronounced among the riskiest 25 percent of accounts opened in 2011. For this segment of the market, the median initial credit limit fell 66.7 percent to $500, and the median limit increase amount fell by at least 25 percent at each observation point. At the same time, limit increases occurred more often and sooner for this group, perhaps in recognition of the very low starting limits.

"Centrality-Based Capital Allocations" Free Download
FRB of Cleveland Working Paper No. 15-01

ADRIAN ALTER, International Monetary Fund
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BEN R. CRAIG, Federal Reserve Bank of Cleveland
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PETER RAUPACH, Deutsche Bundesbank - Research Department
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This paper looks at the effect of capital rules on a banking system that is connected through correlated credit exposures and interbank lending. Keeping total capital in the system constant, the reallocation rules, which combine individual bank characteristics and interconnectivity measures of interbank lending, are to minimize a measure of systemwide losses. Using the detailed German Credit Register for estimation, we find that capital rules based on eigenvectors dominate any other centrality measure, saving about 15 percent in expected bankruptcy costs.

"Acquiring Access to Finance" Free Download

JESS CORNAGGIA, Georgetown University
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JAY Y. LI, City University of Hong Kong
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This paper exploits the deregulation of U.S. interstate banking laws to examine how firms’ financial constraints affect mergers and acquisitions. We find robust evidence that improved access to finance increases the probability that firms become targets in acquisitions. The acquirers driving this result are small and private firms which likely benefit from expanded access to finance. For acquisitions of targets with good access to finance, we confirm that target return premiums are higher, acquirers have better post-merger operating and stock performance, and combined-firm leverage is higher. Overall, these results reveal that targets’ financial resources play an important role in M&A.

"Absence of Interbank Loan Market and Banking Short-Term Liquidity Management Mechanisms: The Most Pressing Problems of the Islamic Finance Model" Free Download

MAGOMET YANDIEV, Moscow State University - Faculty of Economics, Russian Presidential Academy of National Economy and Public Administration (RANEPA)
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The Islamic finance model is sufficiently well specified at the “bank-to-client? level, but does not regulate the “central bank-to-bank? and “bank-to-bank? relationships. This paper proposes a concrete Shariah-compatible mechanism for setting up an Islamic interbank loan market and managing Islamic bank liquidity, which allows a segregation of Islamic and non-Islamic finance. Islamic banks should as a minimum delink from LIBOR and other traditional reference rates and come up with their own financial benchmarks.

"GAAP Difference or Accounting Fraud? Evidence from Chinese Reverse Mergers Delisted from U.S. Markets" Free Download
Journal of Forensic and Investigative Accounting Vol. 7, 2015, 122-145

YIMIAO CHEN, KPMG
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GANG HU, Hong Kong Polytechnic University - School of Accounting and Finance
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LING LIN, University of Massachusetts Dartmouth - Department of Accounting & Finance
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MIN XIAO, Xiamen University - Department of Finance
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In 2012, one in four federal securities class-action lawsuits filed in the U.S. involved Chinese Reverse Merge companies (CRMs). However, these lawsuits sometimes have encountered difficulties in court due to insufficient direct evidence of accounting fraud. We propose a new method for fraud detection: use Chinese companies dual-listed in the U.S. and China to establish a benchmark for the normal GAAP difference between the two countries. Using this methodology, we find that only a small fraction of the discrepancies between delisted CRMs’ financial statements filed in the U.S. and those filed in China can be attributed to GAAP difference. This suggests that the remaining discrepancies, which are large and unexplained, are indeed due to accounting fraud. Therefore, it is reasonable to conclude that delisted Chinese Reverse Merger companies enticed U.S. investors with favorable and fraudulent accounting and financial data.

"The Implicit Costs of Government Deposit Insurance" Free Download

THOMAS L. HOGAN, Troy University
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WILLIAM J. LUTHER, Kenyon College
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Most people believe the benefits of deposit insurance provided by the Federal Deposit Insurance Corporation (FDIC) clearly exceed the costs. However, a growing literature suggests the benefits of FDIC insurance are overstated while the costs are understated. We add to this literature by considering the implicit costs of FDIC. Specifically, we consider the costs arising from (1) an implicit taxpayer backstop and (2) suboptimal pricing. Since such costs are routinely omitted from traditional cost-benefit analysis, most studies of the FDIC tend to be biased in favor government-provided deposit insurance.

"Recapitalizing the Greek Banks: An Empirical Study. Purposes, Implications & Critical Discussion" Free Download

GEORGIOS LOUKAS VOUSINAS, National Technical University of Athens
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This paper aims to shed light on the venture of the recapitalization of the Greek “systemic? banks in the time period following the major global financial crisis in 2008. The principal target is to present an objective representation of the situation that occurred in the Greek banking system, to describe the measures engaged and their implications and also to critically discuss what the future holds. The empirical analysis reveals the intensity of the impact of the financial crisis on the Greek banks, as the majority of them were led to an increase in share capital or bond issues in order to address the lack of capital adequacy and liquidity. Conclusively, the present study highlights the recapitalization procedure of the Greek Banking System and the formation of the new banking map and also sets a number of serious questions thus, laying the ground for a fruitful dialogue among the various stakeholders.

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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.

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BANKING & FINANCIAL INSTITUTIONS EJOURNALS

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

J. DAVID CUMMINS
Joseph E. Boettner Professor, Temple University - Risk Management & Insurance & Actuarial Science

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
Co-Founder, Chairman, Managing Director and Integrity Officer, Social Science Electronic Publishing (SSEP), Inc., Jesse Isidor Straus Professor of Business Administration, Emeritus, Harvard Business School, 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 Business 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