Publications (9)9.5 Total impact
-
Article: Credit Market Competition and Capital Regulation.
[show abstract] [hide abstract]
ABSTRACT: It is commonly believed that equity finance for banks is more costly than deposits. This suggests that banks should economize on the use of equity and regulatory constraints on capital should be binding. Empirical evidence suggests that in fact this is not the case. Banks in many countries hold capital well in excess of regulatory minimums and do not change their holdings in response to regulatory changes. We present a simple model of bank moral hazard that is consistent with this observation. In perfectly competitive markets, banks can find it optimal to use costly capital rather than the interest rate on the loan to guarantee monitoring because it allows higher borrower surplus.02/2009; -
Article: Stakeholder Capitalism, Corporate Governance and Firm Value
[show abstract] [hide abstract]
ABSTRACT: In countries such as Germany, the legal system is such that firms are necessarily stakeholder oriented. In others like Japan social convention achieves a similar effect. We analyze the advantages and disadvantages of stakeholder-oriented firms that are concerned with employees and suppliers compared to pure shareholder-oriented firms. We show that in a context of imperfect competition stakeholder firms have higher prices and lower output than shareholder-oriented firms. Surprisingly, we also find that firms can be more valuable in a stakeholder society than in a shareholder society. With globalization stakeholder firms and shareholder firms often compete. We identify the circumstances where stakeholder firms are more valuable than shareholder firms, and compare these asymmetric equilibria with symmetric equilibria with stakeholder and shareholder firms. Finally, we show that, in some circumstances, firms may voluntarily choose to be stakeholder-oriented because this increases their value.02/2009; -
Article: Competition and Strategic Information Acquisition in Credit Markets
[show abstract] [hide abstract]
ABSTRACT: We investigate the interaction between banks' use of information acquisition as a strategic tool and their role in promoting the efficiency of credit markets when a bank's ability to gather information varies with its distance to the borrower. We show that banks acquire proprietary information both to soften lending competition and to extend their market share. As competition increases, investments in information acquisition fall, leading to lower interest rates but also to less efficient lending decisions. Consistent with the recent wave of bank acquisitions, we also find that merging for informational reasons with a competitor is an optimal response to industry consolidation. Copyright 2006, Oxford University Press.Review of Financial Studies 02/2006; 19(3):967-1000. · 4.75 Impact Factor -
Article: Bank competition and the role of regulation
[show abstract] [hide abstract]
ABSTRACT: Market discipline for financial institutions can be imposed not only from the liability side, as has often been stressed in the literature on the use of subordinated debt, but also from the asset side. This will be particularly true if good lending opportunities are in short supply, so that banks have to compete for projects. In such a setting, borrowers may demand that banks commit to “monitoring” by requiring that they use some of their own capital in lending, thus creating a market-based incentive for banks to hold capital that stems purely from the asset side of the bank’s balance sheet. Borrowers can also provide a bank with incentives to monitor by allowing the bank to reap some of the benefits from the loan, which accrue only if the loan is in fact paid off. Since borrowers do not fully internalize the costs of capital to the bank and of the deposit insurance, the level of capital required by the market may be above the one chosen by a regulator maximizing social welfare. This implies that capital requirements may not be binding.Proceedings. 01/2005; -
Article: Loan-Portfolio Quality and the Diffusion of Technological Innovation
[show abstract] [hide abstract]
ABSTRACT: We study the economic forces that drive innovation in credit-risk assessment and the role of regulators in fostering technological progress. Recent regulatory proposals base capital-adequacy standards on banks' own internal systems and call for regulators to establish a set of "best practices" for the industry. We find that the dissemination of innovations mandated by this approach generates a tension between lowering aggregate banking-system risk ex post and providing banks with incentives to innovate ex ante. Moreover, this tension arises purely from regulatory concern for bank safety and not from any interest in promoting competition. We show that achieving the optimal level of innovation requires that regulators restrict the di#usion of technology. If regulators are unable to commit to specific dissemination policies, it may be beneficial to let banks assert intellectual property rights through, for instance, the patenting of their innovations.05/2004; -
Article: Loan-Portfolio Quality and the Diusion of Technological
[show abstract] [hide abstract]
ABSTRACT: We study the economic forces that drive innovation in credit-risk assessment and the role of regulators in this process. Recent regulatory proposals base capital-adequacy standards on banks' own internal systems and call for regulators to establish a set of "best practices" for the industry. We find that the dissemination of innovations mandated by this approach generates a tension between lowering aggregate banking-system risk ex post and providing banks with incentives to innovate ex ante. Moreover, this tension arises purely from regulatory concern for bank safety, and not from any interest in promoting competition. We show that achieving the optimal level of innovation requires that regulators restrict the di#usion of technology. If regulators are unable to commit to specific dissemination policies, it may be beneficial to let banks assert intellectual property rights through, for instance, the patenting of their innovations.04/2004; -
Article: Information Technology and Financial Services Competition
[show abstract] [hide abstract]
ABSTRACT: We analyze how two dimensions of technological progress affect competition in financial services. While better technology may result in improved information processing, it might also lead to low-cost or even free access to information through, for example, informational spillovers. In the context of credit screening, we show that better access to information decreases interest rates and the returns from screening. However, an improved ability to process information increases interest rates and bank profits. Hence predictions regarding financial claims' pricing hinge on the overall effect ascribed to technological progress. Our results generalize to other financial markets where informational asymmetries drive profitability, such as insurance and securities markets. Copyright 2003, Oxford University Press.Review of Financial Studies 02/2003; 16(3):921-948. · 4.75 Impact Factor -
Article: Relationship Banking and Competition under Differentiated Asymmetric Information
[show abstract] [hide abstract]
ABSTRACT: While competition constrains the ability of banks to extract informational rents from lending relationships, their informational monopoly also curtails competition through the threat of adverse selection. To analyze an intermediary's optimal strategic response to these opposing effects we specify a model where the severity of asymmetric information between banks and borrowers increases with informational distance. Intermediaries acquire expertise in a specific sector and exert effort in building lending relationship beyond their core business. They then compete with each other in transaction and relationship loan markets where they differentiate their loan offers in terms of informational location. As increased competition endogenously erodes informational rents intermediaries shift more resources to building relationships in their core markets. This retrenchment from peripheral loan segments permits banks to fend off the competitive threat to their captive market. Outside their core segment they offer transactional loans. In equilibrium, both forms of debt compete with each other but intermediaries specialize in a core market with relationship banking.03/2000; -
Article: Relationship banking, loan specialization and competition
Proceedings. 02/2000;
