Structural Reforms in Banking: The Role of Trading
Jan Pieter Krahnen, Felix Noth, Ulrich Schüwer
Abstract
In the wake of the recent financial crisis, significant regulatory actions have been taken aimed at limiting risks emanating from trading in bank business models. Prominent reform proposals are the Volcker Rule in the U.S., the Vickers Report in the UK, and, based on the Liikanen proposal, the Barnier proposal in the EU. A major element of these reforms is to separate “classical” commercial banking activities from securities trading activities, notably from proprietary trading. While the reforms are at different stages of implementation, there is a strong ongoing discussion on what possible economic consequences are to be expected. The goal of this paper is to look at the alternative approaches of these reform proposals and to assess their likely consequences for bank business models, risk-taking and financial stability. Our conclusions can be summarized as follows: First, the focus on a prohibition of only proprietary trading, as envisaged in the current EU proposal, is inadequate. It does not necessarily reduce risk-taking and it likely crowds out desired trading activities, thereby negatively affecting financial stability. Second, there is potentially a better solution to limit excessive trading risk at banks in terms of potential welfare consequences: Trading separation into legally distinct or ring-fenced entities within the existing banking organizations. This kind of separation limits cross-subsidies between banking and proprietary trading and diminishes contagion risk, while still allowing for synergies across banking, non-proprietary trading and proprietary trading.
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The Impact of Credit Default Swap Trading on Loan Syndication
Daniel Streitz
Review of Finance,
No. 1,
2016
Abstract
We analyze the impact of credit default swap (CDS) trading on bank syndication activity. Theoretically, the effect of CDS trading is ambiguous: on the one hand, CDS can improve risk-sharing and hence be a more flexible risk management tool than loan syndication; on the other hand, CDS trading can reduce bank monitoring incentives. We document that banks are less likely to syndicate loans and retain a larger loan fraction once CDS are actively traded on the borrower’s debt. We then discern the risk management and the moral hazard channel. We find no evidence that the reduced likelihood to syndicate loans is a result of increased moral hazard problems.
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Legal Insider Trading and Stock Market Liquidity
Hans Degryse, Frank de Jong, Jérémie Lefebvre
De Economist,
No. 1,
2016
Abstract
This paper assesses the impact of legal trades by corporate insiders on the liquidity of the firm’s stock. For this purpose, we analyze two liquidity measures and one information asymmetry measure. The analysis allows us to study as well the effect of a change in insider trading regulation, namely the implementation of the Market Abuse Directive (European Union Directive 2003/6/EC) on the Dutch stock market. The first set of results shows that, in accordance with theories of asymmetric information, the intensity of legal insider trading in a given company is positively related to the bid-ask spread and to the information asymmetry measure. We also find that the Market Abuse Directive did not reduce significantly this effect. Secondly, analyzing liquidity and information asymmetry around the days of legal insider trading, we find that small and large capitalization stocks see their bid-ask spread and the permanent price impact increase when insiders trade. For mid-cap stocks, only the permanent price impact increases. Finally, we could not detect a significant improvement of these results following the change in regulation.
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Trade Union Membership and Paid Vacation in Germany
Laszlo Goerke, Sabrina Jeworrek, Markus Pannenberg
IZA Journal of Labor Economics,
No. 1,
2015
Abstract
In Germany, dependent employees take almost 30 days of paid vacation annually. We enquire whether an individual’s trade union membership affects the duration of vacation. Using data from the German Socio-Economic Panel (SOEP) for the period 1985 to 2010 and employing pooled OLS-estimators, we find that being a union member goes along with almost one additional day of vacation per year. Estimations exploiting the panel structure of our data suggest that a smaller part of this vacation differential can be due to the union membership status, while self-selection effects play a more important role.
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The Impact of Dark Trading and Visible Fragmentation on Market Quality
Hans Degryse, Frank de Jong, Vincent van Kervel
Review of Finance,
No. 4,
2015
Abstract
Two important characteristics of current equity markets are the large number of competing trading venues with publicly displayed order books and the substantial fraction of dark trading, which takes place outside such visible order books. This article evaluates the impact on liquidity of dark trading and fragmentation in visible order books. Dark trading has a detrimental effect on liquidity. Visible fragmentation improves liquidity aggregated over all visible trading venues but lowers liquidity at the traditional market, meaning that the benefits of fragmentation are not enjoyed by investors who choose to send orders only to the traditional market.
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The Age of Global Value Chains: Maps and Policy Issues
Joao Amador, Filippo di Mauro
CEPR Press,
2015
Abstract
Global value chains (GVCs) - referring to the cross-border flows of goods, investment, services, know-how and people associated with international production networks - have transformed the world. Their emergence has resulted in a complete reconfiguration of world trade, bearing a strong impact on the assessment of competitiveness and economic policy. The contributions to this eBook are based on research carried out within the scope of the Eurosystem Competitiveness Research Network (CompNet), bringing together participants from EU national central banks, universities and international organisations interested in competitiveness issues. The mapping of GVCs and full awareness about their implications are essential to informed public debate and improved economic policy.
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Consequences of China’s Opening to Foreign Banks
Ran Li, Xiang Li, Wen Lei, Yiping Huang
L. Song, R. Garnaut, C. Fang, L. Johnston (eds.), China's Domestic Transformation in a Global Context. Acton: ANU Press,
forthcoming
Abstract
China’s government has recently implemented additional reforms to relax the regulatory environment for foreign banks. Specifically, State Council Order No. 657, signed by Premier Li Keqiang, announced a decision to revise the Regulations of the People’s Republic of China on the Administration of Foreign-Funded Banks, effective from 1 January 2015. Implications of the revised regulations include removal of the requirement that a minimum of RMB100 million operating capital be transferred unconditionally from the overseas parent bank to the newly opened Chinese branch. In addition, in terms of the conditions attached to the right to carry out RMB-denominated activity, foreign banks are now eligible to apply to undertake local currency business after operating in China for one year—down from the previous three years. The requirement for two consecutive years of profit will be scrapped as well.
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On the Twin Deficits Hypothesis and the Import Intensity in Transition Countries
Hubert Gabrisch
International Economics and Economic Policy,
No. 2,
2015
Abstract
This article aims to explain the increasing deficits in the trade and current account balances of three post-transition countries–Czech Republic, Hungary, and Poland–by testing two hypotheses: the twin deficit hypothesis and increasing import intensity of export production. The method uses co-integration and related techniques to test for a long-run causal relationship between the fiscal and external deficits of three post-transition countries in Central and Eastern Europe. In addition, an import intensity model is tested by applying OLS and GMM. All the results reject the Twin Deficits Hypothesis. Instead, the results demonstrate that specific transition factors such as net capital flows and, probably, a high import intensity of exports affect the trade balance.
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Assessing European Competitiveness: the Contribution of CompNet Research
Filippo di Mauro, Maddalena Ronchi
CompNet Report,
June
2015
Abstract
Restoring competitiveness is broadly acknowledged as the critical building block for achieving sustainable growth, but defining competitiveness, both in terms of tools as well as objectives, is a matter of debate. The Competitiveness Research Network (CompNet) adopts a pragmatic approach, defining “a competitive economy [as] one in which institutional and macroeconomic conditions allow productive firms to thrive… [thus supporting] the expansion of employment, investment and trade” (Draghi, 2012). This approach requires handling (i) firm-level features, most notably productivity, (ii) macroeconomic factors, and (iii) cross-border aspects related to the operation of global value chains (GVCs). While at first concentrating solely on the original mandate of explaining export competitiveness, the Network has extended the scope of its research to broader aspects related to productivity drivers.
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