Regulations of Financial Markets

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The interplay between regulations and financial stability.

The interplay between regulations and financial stability.

When Lehman Brothers failed in September 2008, it was presumably expected by the Federal Reserve that its failure would not generate contagion. In fact, there was contagion, but it was quite complex. The problem spread first to the Prime Reserve Money Fund due to its exposure to Lehman ’ s debt securities, which further triggered the run on the other money market funds so the government had to intervene rapidly by providing a guarantee of all money market mutual funds. In addition, the failure of Lehman led to a loss of confidence in many financial firms as investors feared that other financial institutions might also be allowed to fail. More importantly, it occurred half a year after the bailout of Bear Stearns, which created the impression that systemically large investment banks were too-big-to-fail. 2 Therefore, when a large investment bank, Lehman was allowed to fail, it called into question that which financial firms were implicitly insured, further leading to a widespread loss in confidence. After the failure of Lehman, the volumes in many important financial markets fell significantly, and there was a large spillover into the real economy. World trade collapsed and in trade based economies such as Germany and Japan GDP fell significantly in the fourth quarter of 2008 and the first quarter of 2009. This dramatic fall in GDP in many countries underlines the importance of the process of contagion.
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Financial Technologies of International Banking Regulations

Financial Technologies of International Banking Regulations

Abstract. The author considers the problems of banking regulation in the context of globalization. An analysis of relevant issues indicates the need to improve financial technologies for banking regulation. Basel innovations, designed to ensure the stability and uninterrupted operation of the global banking system, have led to the creation of counter-innovations by the banking sector. Basel Accords led to the development of the so-called “regulatory rally”, when increasingly sophisticated methods of regulation gave rise to increasingly inventive ways to protect the gains of the banking business. These ways sometimes became an indirect source of rising risks, and were initially taken as effective protection against these risks. The author analyzes the main advantages and disadvantages of the latest Basel Accords on Banking Supervision (Basel III) and identifies specific directions for its improvement, taking into account current practices of national and international approaches to regulating the activities of credit organizations 10 years after the global financial and banking crisis. The importance of the study is determined by the need to develop financial technologies for international banking regulations, as well as theoretical and methodological approaches that determine the interconnectedness and interdependence of financial markets. It is also important to evaluate the effectiveness of measures to regulate the activities of financial and credit institutions at the national and international levels to develop strategies and tactics for the optimal progressive development of financial markets. The purpose of the study is to develop theoretical and methodological approaches to assessing the impact of international standards on activities of Russian credit organizations.
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Credit Rating Agencies, Financial Regulations and the Capital Markets

Credit Rating Agencies, Financial Regulations and the Capital Markets

Even though the provisions in MAD are quite comprehensive and are further augmented by requiring member states to take other steps that could be necessary to deter market manipulation activities, however, there are a number of reasons why the goals of this directive might not be achieved. First, even though issuers are required to immediately disclose all insider information to the public, the directive does allow issuers to withhold such information under the circumstance that the non-disclosure of such information would not mislead investors in their financial decisions. The lack of an objective criterion for disclosure raises concerns that issuers might use this provision to withhold inside information in order to avoid uncertainty and volatility of their stock price. Second, there are concerns about the definition of “inside information” used by the directive in the provision that aims to prohibit inside trading and the provision that calls for the immediate release of all inside information to the public. The European Security Market Expert Group (ESME) report points to the inconsistent interpretation and application of the definition of “inside information”. According to this report, managers are employing different strategies to avoid immediate disclosure of inside information, which they prefer to not be public knowledge. 1 Additionally, there are no guidelines that specify at what point a certain event should be regarded as mature enough to be considered price sensitive information. 2 This could lead to inconsistent disclosure behavior among firms. Third, although the prohibition on the disclosure of information to selective individuals is aimed to enhance the integrity of the financial markets, this restriction may cause a decline in the level and quality of information available to investors. For example, prior literature identifies analysts’ reports and opinions as one of the crucial source of new information for the investors (Griffen, 1976; Imhoff and Lobo, 1984; Asquith et al., 2005). Analysts’ opinions are generally based both on information that is publically available and as well as on the insider information (Moizer and Arnold, 1984; Chugh and Meador, 1984). MAD prohibits the private disclosure of price sensitive information to all parties including the analysts. Thus, the implementation of MAD is expected to lower the level of information available to the analysts. This, in turn, might lower the accuracy of their forecasts. The implementation of MAD might also fail to achieve its objectives simply because mangers may still continue to provide classified information to select groups of investors instead of making the information fully public. Therefore, whether MAD is effective and influences the financial information environment is an empirical question that has not yet been answered in the available literature, thus, we set out to answer that question.
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Financial Markets, Financial Intermediation, and Bailout Policy

Financial Markets, Financial Intermediation, and Bailout Policy

ance pillar of the regulation) and the regulation of the competition (possibly combined with capital adequacy rules, which extends the discussion into the third pillar of the regulation, the prudential supervision). In Chapters 2 and 3, I show that a bailout policy has a posi- tive announcement effect in the world in which depositors’ and bankers’ beliefs regarding the liquidation of an insolvent (but not necessarily bankrupt) bank are asymmetrical. As the above mentioned review shows, the result of most of the literature on bailout policy effects under informational asymmetry is the moral hazard problem: banks tend to take on more risk, and therefore bailouts may be harmful. In contrast, I show that the absence of such a policy can lead to an inefficient allocation of funds in an economy with intermediaries as compared to a market-based economy. I discuss in Chapter 3 a bailout policy of the regula- tor, which combines forbearance and uncertainty, and show that such policy may be optimal for the economy. In Chapters 4 and 5, I consider effectively risk-free economies in which markets and banks provide a dynamically efficient allocation of funds. However, an intro- duction of an exogenous macroeconomic shock stresses the role of the bailout policy, which lets the banks successfully borrow funds from the future generations. At the same time, such a bailout policy alone cannot provide the necessary conditions for recovery of the interme- diated economy after a shock. Complementary regulation which, for example, establishes a deposit rate ceiling based on a capital adequacy ratio is needed.
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Emerging Markets, Financial Openness and Financial Development

Emerging Markets, Financial Openness and Financial Development

Table 3 presents our results with stock market investibility ratio, market capitalization of IFC investible index to global index, as indicator of financial openness, estimates of slope coefficients on standardized explanatory variables are reported together with t-statistics in brackets. Our t-statistics are based on robust standard errors. Fixed- effects estimators are reported in the first 3 columns. P-value associated with group effects tests in all 3 regression models are zero, suggesting significant heterogeneity among our sample countries, this implies pooled OLS estimator will be biased and inappropriate. Twenty four countries are covered in our regressions and on average over a 12-year period. The observed slope coefficients and their t-statistics suggest financial openness (stock market investibility ratio, calculated as market capitalizations of IFC investible index divided by IFC global index) is significant determinant of overall financial system development (FD) and stock market development (SMD), but not for bank development index (BD). Financial openness appears to be the second most influential factor that determines financial development after real per capita GDP, and as important as trade openness. Since variables are standardized, slope coefficients (partial effects) of financial openness on FD and SMD may be interpreted as follows: a unit standard deviation increase of financial openness corresponds to 0.125 standard deviation increase of financial system development (FD) and 0.201 standard deviation increase of stock market development (SMD). Both positive effects are 1% significant. Results of Pool OLS estimators with first differenced variables are then reported in column 4 to 6. Basic implications may be interpreted similarly as the previous three columns, and our model captures around 20% of variations in financial development (R-squired equals to 0.238 and 0.197).
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Financial Intermediation, Markets, and Alternative Financial Sectors

Financial Intermediation, Markets, and Alternative Financial Sectors

In studying the finance-growth nexus, most of the existing research focuses only on the development of markets and banks—the so-called ‘traditional’ financial system. The starting point of our chapter is that this approach is inadequate for the study of corporate financing, especially for (unlisted) small and medium firms, important engines for growth in emerging and developed economies, and the majority of firms in most economies. The recent global crisis has revealed failures in financial markets and problems associated with large financial institutions in developed countries. Market- and bank finance is also highly cyclical and (external) funds from these sources can dry up quickly during crises. In addition, the costs for developing the traditional financial system, and especially a large and efficient market with multiple types of financial products, can be enormous for emerging economies and the process may take several decades. The question is then: are there alternative channels through which firms can raise capital to fund investment before a well-functioning, traditional financial system is built?
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Financial Stability and Financial Markets: Case of Turkey

Financial Stability and Financial Markets: Case of Turkey

make more investments to expand their operation. All these affect banks worse to decrease their lending activities as in the credit rationing concept. Also, it can be explained with the asymmetric information problems if it is difficult to determine the ability of the credit customer into the market place, banks are naturally choosing to decline their credit activities. This is known as credit rationing that banks are declining their loans to the customer to eliminate the adverse selection and moral hazard problems. Consequently, when a shock happens in the financial market that creating financial instability, this is having an adverse influence on the aggregate economic activity via financial intermediation channels into the country.
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Dynamic regulations in non –renewable resources oligopolistic markets

Dynamic regulations in non –renewable resources oligopolistic markets

Dynamic models of exploitation or harvesting and use of natural resources refer to two different systems of property rights: In the case of sole ownership, optimal extraction policies ca[r]

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Banking on Financial Sector Sustainability Regulations

Banking on Financial Sector Sustainability Regulations

Based on their influence as going concerns and financial intermediaries that are essential to the growth of economies, some banks, through the oversight role of their Central Banks and other regulatory bodies are seen to be adopting sustainability regulations and are beginning to address respective principles of each regulation for better performance as it relates to sustainable development. These financial sector sustainability regulations encompass issues pertaining to both banks’ operations and business activities, addressing the need for banks to engender sustainable strategies, products and services as well as practices in order to drive solutions to diverse sustainability issues which include but are not limited to climate change, environmental pollution, eco-efficiency, poverty and human rights. Financial sector regulatory authorities in China, Nigeria and Bangladesh led the way in the establishment of mandatory guidelines in 2012 although guidelines have existed since 2007 and 2011 for China and Bangladesh respectively. However, oblivious of the effect of these regulations on the performance of banks in these countries in addressing the principles of their country-specific regulation, this research, on one hand, examines the impact of the Chinese Green Credit Guidelines (GCG), Nigerian Sustainability Banking Principles (NSBP) and the Bangladeshi Environmental Risk Management (ERM) Guidelines on banks within the territory of respective regulatory establishment by carrying out empirical analysis of their annual, sustainability and corporate social responsibility reports. On the other hand, consideration is given to banks in countries similar to the aforementioned to analyze their performance in addressing the regulatory principles of their mandated peers.
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Modern Financial Markets and the Complexity of Financial Innovation

Modern Financial Markets and the Complexity of Financial Innovation

The Social impact bond (SIB) is one example of a new, innovative and complex financial instrument which means to address social issues which have traditionally been addressed by government programs and/or philanthropic organizations, generally exclusive of each other, whether at the local, county, state or federal levels. SIBs blend these two institutions and the additional component of market investors in a complex contractual relationship intended to address the perceived challenges of traditional program approaches. In particular, the startup costs of new programs are often prohibitive. In many cases, only a government has access to the funds required to start and maintain a new social benefit program. Government programs however are often long running and address the symptoms of a problem without mitigating the core of the problem as evidenced by steady or increasing numbers of people served by some government programs. In an environment of shrinking budgets, it is politically risky to argue for the continuance of existing programs, not to mention fund new ones. The perceived benefit of SIBs is that the government does not have to fund as much, or in some cases any, of the upfront costs of a new program. More importantly, the government in some cases does not have to pay out at all if the program does not achieve the agreed upon outcome of the program. In that case the investors have assumed all the risk and lose their investment. In cases where the outcome is achieved, the government pays out of the calculated savings the program generated by reducing the demand for government services.
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Financial Intermediation, Markets, and Alternative Financial Sectors *

Financial Intermediation, Markets, and Alternative Financial Sectors *

Some recent research provides a different view on the comparison between these two sets of financing channels. First, Allen, Qian, and Qian (AQQ (2005)) demonstrate that China—currently the second largest economy in the world—provides a significant counterexample to most of the existing research in law, institutions, finance, and growth. During China’s transformation (1980-2010), neither its legal institutions nor its traditional financial systems were well developed, and the government was regarded as autocratic and corrupt. Yet, its economy grew at the fastest pace in the world. Moreover, the most dynamic corporate sector, with various forms of private ownerships (including joint ownership with local governments), relies mostly on alternative finance and provides the engine for growth in the economy. Second, Allen, Chakrabarti, De, Qian, and Qian (ACDQQ (2012)) find that, despite the English common-law origin and a British-style judicial system, formal legal and financial institutions are of limited use in India, now the fourth largest economy in the world (in purchasing power parity, or PPP terms). They also find that alternative finance is the most important form of external finance and that those firms with access to bank or market finance are not associated with higher growth rates over firms relying on alternative finance.
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Effects of U.S. Financial Regulations on Labor Markets

Effects of U.S. Financial Regulations on Labor Markets

Until early 1970s, the creation and expansion of commercial banks were heavily restricted in the U.S. The McFadden Act, which was passed in 1927, gave states the ability to regulate creation of bank branches within their state borders. The Bank Holding Act of 1956 barred bank holding companies from acquiring banks across state lines unless the target state had a law explicitly allowing interstate acquisitions. Bank expansions largely occurred through multi-bank holding companies (MBHC) which operated individual commercial bank branches as separate institutions. Strong branching regulations were maintained in part because they led to the creation of local bank monopolies who lobbied to maintain restrictions. Further- more, monopolistic banking charters were an important source of tax revenue (Kroszner and Strahan, 1999). In the 1970s, the introduction of technologies such as the ATM, as well as the creation of chequable money market funds lead to a decline in the relative importance of relationship lending among banks. Expansion minded banks and special interest groups lobbied for the removal of banking restrictions (Krozner and Strahan 2014). Deregulation involved three types of reforms. The first reform allowed multi-bank holding companies (MHBC) chartered in a state to merge or acquire existing branches. MHBCs could consoli- date their existing branches into a single network and purchase branches from other MHBCs. The second type of reform, allowed ’De novo’ branching, which allowed MHBCs to open new branches within their charter state. The third reform allowed out of state banks to purchase branches within a states borders.
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Theory of argumentation in financial markets

Theory of argumentation in financial markets

This paper aims to explore the relevance of the Theory of Argumentation TA in the complex area of financial reporting. Specifically, we investigated the scope of the phenomenon of persuasion in advertising. It examines advertisements in publications notable economic movement in Colombia. The financial communication is important to distinguish how to run the models of behavior based on beliefs of agents. Consequently, investors' beliefs can also change systematically with changes in market prices. This paper is the first part and its purpose is to prepare from the Theory of Argumentation TA an application to the financial sector in Colombia.
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Asymmetric information and financial markets

Asymmetric information and financial markets

Investigations on the Theory of Argumentation TA with specific applications in Colombia are relatively low (Estrada, 2005, 2007, 2008) and in the general literature there are few studies that have been developed (Dascal, 2003). Although early are intuitive nature Tullock (1967). Posner (1995) makes a distinction between persuasion and information from the classical tradition. Recent analysis hatred (Glaeser, 2005), mass media (Mullinathan, Shleifer 2005). Shapiro studied persuasion in politics (2005), especially in the presentation of models in marketing and advertising campaigns. Laibson (2005) extends the analysis to the links between consumer products and key psychological effects. Undoubtedly, the analysis of financial markets requires an extension notice the advantages of analysis proposed by the Theory of
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Agricultural commodities and financial markets

Agricultural commodities and financial markets

Agricultural commodities and financial markets Modena, Matteo Università Cattolica del Sacro Cuore, Milano.[r]

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Analysis of Chinese financial markets

Analysis of Chinese financial markets

several important ways: a longer time series of data is used; the break p~int in the data is determined endogenously; and the analysis focuses on the degree to which common trends have e[r]

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Scaling and multiscaling in financial markets

Scaling and multiscaling in financial markets

An earlier model introduced by Mandelbrot [10], which has become very popular in the physics literature, is the Levy Flight (LF) model. A LF is a random walk in which the step lenght is chosen from a Levy distribution. Since Levy distributions are stable under convolution the LF process exhibits exact self-similarity. The exact scaling of both FBM and LF is not consistent though with the scaling break down observed in financial market data. To overcome the many limitations of Levy flights (not last the difficulties to deal with a process with a diverging second moment) Truncated Levy flights (TLF) have been introduced. A TLF is a process based on a truncated Levy stable distribution with a cut-off in its power law tail. The truncation can be introduced as a sharp cut-off as in Mantegna and Stanley [1] or, to preserve the infinitely divisible property of the pdf through a smoother exponential decay in the tail as in Koponen [11]. Because of the cut-off the distribution is no longer self-similar when convoluted and has finite variance. Even though the TLF pdf belongs to the basin of attraction of a Gaussian, it converges to the Gaussian very slowly and the process exhibits Levy scaling in a wide range of sampling intervals. Nakao [12] has shown that TLFs a la Koponen exhibit the simplest form of multiscaling, i.e. bi-fractality. Nonetheless his results, i.e. φ q = q/α for 0 < q < α
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Financial markets in time of stress

Financial markets in time of stress

integrated internationally. 3 4 Such differentiation in the sensitivity to external shocks or the extent of global integration may arise for several reasons. For instance, Reinhart and Reinhart (1999) provide a simple model where investors have perfect access to the international bond market but bank customers do not. They show that if depositors have access to international capital markets interest rates on deposits will co-move with the international interest rates on bonds, but if borrowers cannot borrow from abroad, lending rates of interest need not covary with the international interest rates on bonds. 5 Similarly, if a government allows its bonds to be freely traded internationally but has restrictions on the foreign ownership of equities, one would expect that bond yields would be more responsive to external shocks than equity returns. However, market segmentation of these types will not be the only reason why some asset markets may be more sensitive to external shocks than others. While a variety of narratives describing episodes of contagion suggest that speculative attacks on currencies are bunched together across countries, the heterogeneity in exchange rate arrangements and monetary policy across countries would suggest that exchange rates and the Αpolicy≅ domestic interest rate are
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Group behaviour in financial markets

Group behaviour in financial markets

114 of 'stickiness', that is, how quickly a trader reacts to changes in dividends. Fundamental traders buy if the stock's dividend is high enough above a constant interest rate and sell if the dividend is relatively low, but can vary further in their characteristics due to differences in risk aversion and reaction speeds. The price updating process involves agents placing orders into a virtual order book, and, when buyers and sellers overlap, a trade takes place. With N traders and N/2 shares available, each agent is only able to own 1 share, meaning half the agents are potential buyers and half potential sellers. Note there are no short positions in this model. At each time-step, an agent is chosen at random to either update a bid (a price to buy) or offer (a price to sell) or do nothing. If a buyer is willing to buy at or above the price at which someone is willing to sell, a trade takes place, and vice-versa for traders who are already owners of a share and wishes to sell. This incremental updating of prices on the basis of buy and sell orders is in line with the actual functioning of real markets, which typically trade on the basis of a continuous double auction (to be described in detail in the following chapters).
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Bidding markets with financial constraints

Bidding markets with financial constraints

We develop a model of bidding markets with financial constraints a la Che and Gale (1998b) in which two firms optimally choose their budgets. First, we provide an alternative explanation for the dispersion of markups and “money left on the table” across procurement auctions. Interestingly, this explanation does not hinge on signif- icant private information but on differences, both endogenous and exogenous, in the availability of financial resources. Second, we explain why the empirical analysis of the size of markups may be biased downwards or upwards with a bias positively cor- related with the availability of financial resources when the researcher assumes that the data are generated by the standard auction model. Third, we show that large concentration and persistent asymmetries in market shares together with occasional leadership reversals can arise as a consequence of the firms internal financial decisions even in the absence of exogenous shocks.
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