Browsing Center for Law, Economics & Financial Institutions (LEFIC) by Year Published
Now showing items 1-20 of 48
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Wihlborg, Clas; Angkinand, Apanard (København, 2005)[More information][Less information]
Abstract: The ambiguity in existing empirical work with respect to effects of deposit insurance schemes on banks’ risk-taking can be resolved if it is recognized that absence of deposit insurance is rarely credible and that the credibility of non-insurance can be enhanced by explicit deposit insurance schemes. We show that under reasonable conditions for effects on risk-taking of creditor protection in banking, and for effects on credibility of non-insurance of explicit coverage of deposit insurance schemes, there exists a partial level of coverage that maximizes market discipline and minimizes moral hazard incentives for risk-taking in banking. Using both the occurrence of banking crises and non-performing loans in the banking sector as proxies for excessive risk-taking the results strongly support this hypothesis in industrial and emerging market economies. Policy recommendations on the country level require analyses of institutional factors affecting the credibility of non-insurance. In particular, the implementation of effective distress resolution procedures for banks would allow governments to reduce explicit deposit insurance coverage and, thereby, to strengthen market discipline. JEL Classification: G21; G28; F43 Keywords: Deposit Insurance; Banking Crisis; Insolvency Procedures, Market Discipline URI: http://hdl.handle.net/10398/6808 Files in this item: 1
wplefic102005.pdf (642.4Kb) -
New Challenges and Opportunities for RegulatorsGoldberg, Lawrence G.; Sweeney, Richard J.; Wihlborg, Clas (København, 2005)[More information][Less information]
Abstract: Nordea is the first major international bank planning to operate important host country activities in branches as the Second European banking directive envisions rather than as subsidiaries. Nordea is the result of mergers of roughly equal-size universal banks in four Nordic countries with the intention to reap economies of scale and scope by providing services in an integrated organization. Nordea has so far operated under a legal structure with subsidiaries in the host countries. When the new branch organization is implemented, EU directives specify that the home country is responsible for supervision, regulation as well as deposit insurance. Supervisors in all involved countries are challenged by this prospect and they are negotiating to obtain an acceptable division of responsibilities. We argue that the Nordea case offers an opportunity to implement the EU's vision and to develop institutional foundations for substantial market discipline in banking. In particular, distress resolution and insolvency procedures for banks must be made rule based and credible for host country authorities to accept home country control. URI: http://hdl.handle.net/10398/6783 Files in this item: 1
wplefic042005.pdf (209.7Kb) -
Wihlborg, Clas; Angkinand, Apanard (København, 2005)[More information][Less information]
Abstract: Predetermined, operational procedures for dealing with banks in distress are conspicuously absent across the world with very few exceptions. Instead governments and regulatory authorities intervene when banks approach failure. Bail-outs of important creditors, sometimes including shareholders, and blanket guarantees for creditors become the norm. We argue that efficient incentives of banks’ creditors, as well as of shareholders and managers, require predetermined rules for dealing with banks in distress, and a group of creditors that are credibly non-insured. Cross-border banking increases the need for pre-determined bank insolvency procedures that could enable banks to expand cross-border in branches. In the empirical part we show that credibility of non-insurance is maximized with a partial deposit insurance scheme, and that the coverage can be decreased if effective rule-based distress resolution procedures are implemented. URI: http://hdl.handle.net/10398/6773 Files in this item: 1
wplefic082005.pdf (249.8Kb) -
Angkinand, Apanard; Wihlborg, Clas (København, 2005)[More information][Less information]
Abstract: Market discipline in banking requires that explicit and implicit insurance schemes for financial sector firms are limited, and that the lack of insurance of important stakeholders is credible. This credibility cannot be achieved without transparent, predictable procedures for distress resolution for banks, including explicit rules for the liquidation of insolvent banks. We find that very few European countries have explicit procedures for dealing with problem banks. The propositions tested in this paper are that the credibility of non-insurance in European banking depends strongly on (i) the degree of coverage of deposit insurance schemes, and (2) on the existence of enforceable rules that enhance the credibility of non-insurance of groups of stakeholders.in bank. The proxy used for credibility of non-insurance in Europe is the probability of banking crisis. Finding a U-shaped relation between the probabiity of banking crisis and the coverage of explicit deposit insurance we derive the degree of coverage that minimizes the probability of crisis in Western and Eastern Europe. JEL Classification: G21; G28; F43 Keywords: Deposit Insurance; Banking Crisis; Insolvency Procedures, Market Discipline URI: http://hdl.handle.net/10398/6798 Files in this item: 1
wplefic062005.pdf (278.1Kb) -
Lando, Henrik (København, 2005)[More information][Less information]
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Lando, Henrik (København, 2005)[More information][Less information]
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A Law and Economics Perspective on Optimal ContractingLando, Henrik (København, 2005)[More information][Less information]
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Abstract: This article studies the involuntary transfer of property rights by theft - a topic almost unexplored in the law and economics literature. The question is whether a buyer of a stolen good should obtain title to the good if he/she has purchased it in good faith. As described in the article different jurisdictions treat this issue differently. The traditional theory suggests that there is a tradeoff between the costs of protecting the good and the costs of verifying the ownership. However, as shown, the rule of law concerning this issue significantly affects parties’ incentives. Specifically, it is shown that a rule of law where good faith is irrelevant in determining the issue of property rights Pareto dominates a rule where good faith may protect an innocent buyer. Thus, an owner of an asset will spend more resources on protecting his property and potential buyers will incur higher costs in order to verify the ownership when good faith is decisive for the transfer of property rights. JEL Classification: K11, K14 and K42 Keywords: property right law, theft, good faith and game theory URI: http://hdl.handle.net/10398/6802 Files in this item: 1
wplefic092005.pdf (324.7Kb) -
Evidence from Market and Accounting DataGoldberg, Lawrence G.; Sweeney, Richard J.; Wihlborg, Clas G. (København, 2005)[More information][Less information]
Abstract: This paper discusses results and difficulties of comparing banks' performance based on publicly available data for the case of Nordea, a pan-Nordic bank created through mergers of important national banks. The objective of the performance comparison is to determine whether Nordea's unique strategy of functional intergation across four countries can be advantageous. For stock-market data, however, Nordea does not have stable betas on risk factors, as illustrated by market betas, and thus the comparables method must be used with great care. The Nordea holding company performed about as well as the comparables, both in terms of stock-market and accounting data. Nordea banks in individual countries outperformed comparable holding companies; by arithmetic, Nordea non-bank operations are not as profitable as its bank operations. In event studies, the market views Nordea's acquisitions as adding value. URI: http://hdl.handle.net/10398/6812 Files in this item: 1
wplefic052005.pdf (339.2Kb) -
Lando, Henrik (København, 2004)[More information][Less information]
Abstract: The paper argues that society should vary the sanction applied to a criminal defendant with the weight of the evidence against him or her. This is optimal when it is costly for society to apply sanctions, since it can yield the same degree of deterrence while requiring fewer resources to be spent on sanctioning. Furthermore, when the unfairness of convicting an innocent defendant increases with the size of the sanction, this provides a further rationale for graduating sanctions with the probability of guilt. Some objections are briefly discussed, mainly that it is inherently unfair to apply different sanctions on people, who have committed the same offense, and that the legal system will lose legitimacy if it allows sanctions to vary in the way suggested. URI: http://hdl.handle.net/10398/6820 Files in this item: 1
wplefic082004.pdf (289.7Kb) -
Wihlborg, Clas (København, 2004)[More information][Less information]
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Lando, Henrik (København, 2004)[More information][Less information]
Abstract: This article compares a set of often used simple contracts or mechanisms in terms of how well they allocate decision rights between two agents over time. A basic assumption is that agents incur a fixed cost each time they renegotiate. The contracts or mechanisms studied are: individual ownership and authority, the first-come first-serve rule, the alternating rule and the sign-up rule. One trade-off that arises is the following: when usage of the asset is flexible in the sense that it does not matter in which period it occurs, agents may rely on obtaining the asset through arriving first at some point, while when an agent needs to time and plan the use of the asset, he or she may wish to hold stronger rights or to use the sign-up rule as a simple form of contracting. (JEL:D10, D23, L22); Keywords: Incomplete contracts, individual ownership,first-come first-serve rule, costly renegotiation. URI: http://hdl.handle.net/10398/6815 Files in this item: 1
wplefic012004.pdf (658.9Kb) -
Lando, Henrik (København, 2004)[More information][Less information]
Abstract: It is natural to suppose that delegation and incentives are complementary both in the sense that when more decisions are delegated to a lower level of an organizational hierarchy, more use should be made of incentives at that level, and in the sense that more use of incentives should be accompanied by more delegation. This issue is analyzed within a Principal-Agent framework in which there are two decisions to be made: an effort decision which can only be made by the Agent, and some other decision which can be made by either the Principal (i.e. be centralized) or by the Agent (i.e. be delegated). Within this framework it is shown that delegation and incentives are not necessarily complementary instruments; some decisions should be centralized when incentives are introduced. URI: http://hdl.handle.net/10398/6813 Files in this item: 1
lefic 2004-02.pdf (234.2Kb) -
A comparative analysis of the explanatory power of accounting and patent information for the market values of German firmsRamb, Fred; Reitzig, Markus (København, 2004)[More information][Less information]
Abstract: We present a theoretical and empirical analysis of the fitness of national German (German Commercial Code – Handelsgesetzbuch (HGB)) and international (IAS and US-GAAP) accounting information, as well as European patent data to explain the market values of German manufacturing firms. For the chosen volatile period from 1997 to 2002, cautious national accounting information does not correlate with the firms’ residual market values (RMV). International accounting information makes no meaningful contribution to explaining firms’ RMV and seems to measure overinvestment only. Finally, patents counted at the individual country level correlate with the firms’ RMV. Keywords: Accounting standards, investor information, market value, patents JEL-classifications: D82, M40, M41, K11 URI: http://hdl.handle.net/10398/6814 Files in this item: 1
wplefic072004.pdf (390.9Kb) -
Vensel, Vello (København, 2004)[More information][Less information]
Abstract: In the 1990s, most of the Central and Eastern European countries (CEECs) went through radical liberalization and adopted large-scale economic and political reform programs. These programs included almost complete price, trade and capital movement liberalization, macroeconomic stabilization, currency reform, and small-scale and large-scale privatization. What is the role of the development of a legal and institutional infrastructure along with these radical changes in society and the economy? The first part of this paper is based on the results of an interview study of entrepreneurs and managers in Estonia undertaken in 1998 and in Estonia, Russia, Finland and Sweden in 2000 in order to obtain their view of the behavior of government agencies, lawmaking procedures and the operation of law enforcement mechanisms. The second part of this paper presents summary results from interview surveys of Estonian manufacturing firms undertaken from 1994-2000. The surveys were designed to quantitatively measure the state of and changes in the Estonian business environment, focusing on the key aspects of financial contractual relationships of Estonian manufacturing firms as well as regulation and dispute resolution mechanisms. Among the observations it is noted that government regulations do not seriously affect business decisions regarding the operation, expansion or closing down of Estonian manufacturing firms. A second observation is that the Estonian court system is perceived as inadequate for resolving a substantial number of disputes and conflicts among economic agents although legislation exists. Most firms rely on mechanisms of self-enforcement when possible. Journal of Economic Literature Classification numbers: K42, K49, G18, G30 Keywords: business environment, corporate financial relationships, enterprise restructuring, corruption, law making procedures, law enforcement. URI: http://hdl.handle.net/10398/6790 Files in this item: 1
wplefic042004.pdf (248.8Kb) -
Wihlborg, Clas (København, 2004)[More information][Less information]
Abstract: The democratic deficit in the so-called bargaining democracy provides the motivation for constitutional efforts to limit the ability of different groups to form coalitions that are able to grant benefits to themselves through legislation that more or less directly benefit identifiable groups. A constitutional hierachy of laws that stand in conflict is proposed. In this hierarchy more "rule-oriented" legislation dominate less "rule-oriented" legislation. The main purpose of the proposal is to create a momentum of the political process towards more rule-oriented policy actions and legislation, and to inspire the policy debate to focus on principles and rules to an increasing extent. At the same time, the difficulty of defining a rule as opposed to an outcome-oriented directive is avoided by limiting the task of a constitutional court to simply rank conflicting policy actions with respect to the degree actions satisfy criteria for rules. URI: http://hdl.handle.net/10398/6791 Files in this item: 1
wplefic052004.pdf (195.8Kb) -
Lessons from the UKMallin, Chris; Mullineux, Andy; Wihlborg, Clas (København, 2004)[More information][Less information]
Abstract: In 1992 the Cadbury Committee report on the financial aspects of corporate governance was published. The Committee had been established following the failures of a number of high profile businesses in the UK which had shaken confidence in the market. Some nine years later, in 2001, the collapse of Enron sent shockwaves through the US market. As a result of the Enron collapse and various other high profile scandals in the years since its occurrence, the US is examining its own corporate governance structures and provisions to determine how these might be improved and help avoid another Enron. The EU similarly is developing principles and legislation to improve corporate governance, and scandals such as Royal Ahold and Parmalat have helped drive further governance reforms. In this paper we detail the development of corporate governance codes in the UK and the adaptation of similar codes in the EU. We discuss the role of the financial sector in corporate governance and how principles for regulation and supervision of the financial sector complement codes of conduct and legislation in the area of corporate governance. JEL Classification numbers: G34, G28, G22, G23 Keywords: corporate governance, financial sector; institutional investors. URI: http://hdl.handle.net/10398/6789 Files in this item: 1
wplefic062004.pdf (171.8Kb) -
Lando, Henrik (København, 2004)[More information][Less information]
Abstract: Does wrongful conviction lower deterrence and can this explain society’s aversion to sanctioning the innocent? This paper argues that for some of the most important categories of crime such as murder, assault or robbery, the answer to both questions is no. For these categories of crime, a potential offender need not fear wrongful conviction for any particular criminal act he or she chooses not to commit. For example, if a potential offender decides not to murder another person, he or she should not fear being wrongfully convicted of it, since the person will not be dead, and there will therefore be no investigation and no trial. He of she may risk being wrongfully convicted of another crime, but that risk exists independently of his or her own actions. It may be argued that wrongful conviction lowers deterrence in more indirect ways. First, the possibility of being sanctioned for a crime one does not commit may lower the threat of being sanctioned for a crime one commits, if two sanctions are not twice as threatening as one. Second, if wrongful conviction halts further investigations that may lead to the true offender, and third, if a potential offender thinks that if he or she does not take advantage of a crime opportunity, he or she may be wrongly convicted in the event that some other person grasps the same opportunity. However, it will be argued that wrongful conviction may also increase deterrence, and the three indirect effects are in any event unlikely to be quantitatively important in the real world. An implication of the present analysis is that society’s aversion to sanctioning the innocent cannot be rationalized by or reduced to a concern for deterrence. URI: http://hdl.handle.net/10398/6803 Files in this item: 1
wplefic092004rev2.pdf (163.7Kb) -
Møllgaard, Peter (København, 2003)[More information][Less information]
Abstract: Abstract: Price correlations are used to delineate the geographic market in two recent Danish electricity cases. They indicate that power generators hold temporally transitory and irregularly intermittent dominant positions. Calculation of the Lerner index reveals that they abused this position. The Danish Competition Authority decided to settle this case by agreement for reasons explained. We finally indicate how economics may be used pro-actively to achieve a better market design. URI: http://hdl.handle.net/10398/6801 Files in this item: 1
wplefic022003.pdf (404.6Kb) -
Franke, Guenter; Peterson, Sandra; Stapleton, Richard C. (København, 2003)[More information][Less information]
Abstract: Investors choosing a portfolio strategy, in order to secure a pension at a future date for example, are faced with many uncertainties. One major uncertainty is the amount by which their pension fund will be supplemented by personal savings from a variety of sources such as life insurance contracts, bequests, or property sales. Over long periods of time these uncertainties are likely to be large and difficult to hedge, and hence may have a significant effect on the dynamic portfolio strategy. Drawing on the results of previous literature on the reaction of investors to non-unhedgeable background risk, and on the theory of stochastic dynamic programming, this article derives optimal strategies for investors maximising the expected utility of terminal wealth, where this wealth consists of the value of a pension fund plus accumulated personal savings. Numerical results, assuming that the market portfolio and the expectation of personal savings follow (possibly) correlated geometric Brownian motions, are derived to illustrate the effects of the size and uncertainty of the personal savings, as well as the effect of the resolution of the uncertainty in them over time. The computation uses a new technique for implementing the stochastic dynamic programming. This involves a binomial approximation, in two dimensions, which ensures that the computations are feasible for relatively long-term problems. URI: http://hdl.handle.net/10398/6795 Files in this item: 1
wplefic192003.pdf (540.9Kb)
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