scholarly journals Collective Moral Hazard and the Interbank Market

2020 ◽  
Vol 2020 (098) ◽  
pp. 1-60
Author(s):  
Levent Altinoglu ◽  
◽  
Joseph E. Stiglitz ◽  
Keyword(s):  
Moral Hazard ◽  
Financial Institutions ◽  
Portfolio Choice ◽  
Risk Taking ◽  
Financial System ◽  
Interbank Market ◽  
Constrained Efficiency ◽  
Macroprudential Regulation ◽  
Systemic Crisis ◽  
The Government

The concentration of risk within financial system is considered to be a source of systemic instability. We propose a theory to explain the structure of the financial system and show how it alters the risk taking incentives of financial institutions. We build a model of portfolio choice and endogenous contracts in which the government optimally intervenes during crises. By issuing financial claims to other institutions, relatively risky institutions endogenously become large and interconnected. This structure enables institutions to share the risk of systemic crisis in a privately optimal way, but channels funds to relatively risky investments and creates incentives even for smaller institutions to take excessive risks. Constrained efficiency can be implemented with macroprudential regulation designed to limit the interconnectedness of risky institutions.

scholarly journals ISSUES AND CHALLENGES OF FINANCIAL MANAGEMENT PRACTICES IN ISLAMIC FINANCIAL INSTITUTIONS: EMPIRICAL EVIDENCE FROM BANGLADESH

2021 ◽  
Vol 5 (1) ◽  
pp. 38-55
Author(s):  
Serajul Islam ◽  
Abdullahil Mamun ◽  
K. M. Anwarul Islam ◽  
Mohammad Rahim Uddin ◽  
Tania Sultana
Keyword(s):  
Financial Institutions ◽  
Financial Management ◽  
Management Practices ◽  
Financial System ◽  
Principal Component ◽  
Insurance Companies ◽  
Regulatory Body ◽  
Principal Component Factor Analysis ◽  
Islamic Financial Institutions ◽  
The Government

Studies suggest several issues and challenges of financial management practices in Islamic banks and insurance companies and Islamic non-bank financial institutions (INBFIs) in Bangladesh. The purpose of the research is to examine the issues and challenges of Islamic Financial Management (IFM) from an empirical perspective. The study relies on a structured questionnaire survey in prominent Islamic financial institutions (IFIs) of Bangladesh for achieving its objective. After confirming data reliability based on Cronbach's alpha, the study proceeds to analyse by applying descriptive statistics and principal component factor analysis using correlation, Kaiser-Meyer-Olkin (KMO) and Bartlett's Test and VARIMAX Rotation. The study finds that there is no separate regulatory framework to supervise and monitor IFIs in Bangladesh rather the central bank regulates the Islamic financial system based on the existing laws and regulations of the conventional financial system. The findings of this study suggest that the government should establish a separate regulatory body for monitoring the IFI’s functions so that they can perform their activities smoothly in the congenial environment in Bangladesh. JEL Classification Codes: G10, G21, G23.

What Matters in Determining Capital Surcharge for Systemically Important Financial Institutions?

2013 ◽  
pp. 211-224 ◽  
Author(s):  
Céline Gauthier ◽  
Toni Gravelle ◽  
Xuezhi Liu ◽  
Moez Souissi
Keyword(s):  
Financial Institutions ◽  
Banking System ◽  
Financial System ◽  
Centrality Measures ◽  
Network Structures ◽  
Interbank Market ◽  
Small Bank ◽  
Good Proxy ◽  
What Matters

One way of internalising the externalities each individual bank imposes on the rest of the financial system is to impose capital surcharges (KS) on them in line with their systemic importance. Given the complexity of the financial system and the resulting difficulties in measuring systemic importance, it is sometimes argued to simply apply higher KS to larger banks, abstracting from other factors like interconnectedness. In this chapter, the authors consider different network structures of the banking system that are characterized by two different centrality measures. Their main finding is that size alone is not always a good proxy for systemic importance and must be supplemented with detailed information on interbank exposures. A relatively small bank playing an outsized role in the interbank market might be more systemic, and thus garner a higher capital surcharge, than a less connected bank of somewhat larger size. Alternatively, if the centrality of banks in an interbank network is positively correlated with their size, then proxies of a bank’s systemic importance largely based on size are sufficient indicators.

MODEL WAKAF UANG PADA PEMBIAYAAN BARANG PUBLIK DI INDONESIA

2020 ◽  
Vol 3 (1) ◽  
Author(s):  
Nova Rini
Keyword(s):  
Public Goods ◽  
Financial Institutions ◽  
Analytical Method ◽  
Financial System ◽  
Financial Instruments ◽  
Literature Study ◽  
Islamic Financial Institutions ◽  
The Government

This article aims to discuss the waqf model in the country's social financial system that can be used in Indonesia, especially in financing public goods. The analytical method used is literature study. The analysis shows that Indonesia can use the waqf money model to finance public goods by investing money waqf through Islamic financial institutions and / or Islamic financial instruments. This model is in accordance with the model that is also offered in money waqf management in Malaysia. So that the government can reduce spending especially on financing pure and mixed public goods.

scholarly journals Efficient Bailouts?

2016 ◽  
Vol 106 (12) ◽  
pp. 3607-3659 ◽  
Author(s):  
Javier Bianchi
Keyword(s):  
Financial Crisis ◽  
Moral Hazard ◽  
Risk Taking ◽  
Equilibrium Model ◽  
Financial Crises ◽  
Balance Sheet ◽  
Ex Post ◽  
Ex Ante ◽  
Systemic Crisis ◽  
Increase In Risk

We develop a quantitative equilibrium model of financial crises to assess the interaction between ex post interventions in credit markets and the buildup of risk ex ante. During a systemic crisis, bailouts relax balance sheet constraints and mitigate the severity of the recession. Ex ante, the anticipation of such bailouts leads to an increase in risk-taking, making the economy more vulnerable to a financial crisis. We find that moral hazard effects are limited if bailouts are systemic and broad-based. If bailouts are idiosyncratic and targeted, however, this makes the economy significantly more exposed to financial crises. (JEL E23, E32, E44, E63, G01, G21, G28)

scholarly journals TATA KELOLA SISTEM PENJAMINAN SIMPANAN PERBANKAN DI INDONESIA

2020 ◽  
Vol 2 (2) ◽  
pp. 113-125
Author(s):  
Sjafruddin Sjafruddin ◽  
Iskandar Iskandar
Keyword(s):  
Interest Rate ◽  
Moral Hazard ◽  
Risk Taking ◽  
Deposit Insurance ◽  
Banking System ◽  
Public Confidence ◽  
Insurance System ◽  
Deposit Insurance System ◽  
Governance Process ◽  
The Government

The ratification of Law Number 24 of 2004 concerning the Deposit Insurance Corporation (LPS) marks the formal process of institutionalizing the deposit insurance system in Indonesian banking. After the banking systemic crisis in 1997 that hit various countries including Indonesia, the government made various stabilization and reform policies in the financial sector to improve the banking system. The blanket guarantee policy for bank customer deposits in 1998 with no limits (blanket guarantee) restored public confidence in banks, but on the other hand this guarantee also created a moral hazard risk for banks. The existence of the LPS ended the unlimited deposit insurance system by limiting the guarantee in the form of a deposit insurance limit and a guaranteed interest rate known as the LPS interest rate. This article attempts to describe and analyze the institutionalization process and governance process in the deposit insurance system in Indonesia. The results show that the process of institutionalizing the deposit insurance system in Indonesia is carried out in stages by assessing banking risk taking and public perceptions of the banking industry in Indonesia. In the governance process, the LPS carries out its function as guarantor of deposits of depositors, LPS is tasked with determining and formulating policies for implementing deposit insurance and implementing deposit insurance. LPS makes payment of guarantee claims to depositors from banks whose business licenses have been revoked as long as they meet the requirements stipulated by the LPS Law.   Keywords: Deposit Insurance Agency, Institutionalization, Governance.     Abstrak Lahirnya Undang-Undang Nomor 24 Tahun 2004 tentang Lembaga Penjamin Simpanan (LPS) menandai proses formal institusionalisasi sistem penjaminan simpanan pada perbankan di Indonesia. Setelah Krisis sistemik perbankan tahun 1997 yang melanda berbagai negara termasuk Indonesia, pemerintah membuat berbagai kebijakan stabilisasi dan reformasi di sektor keuangan guna menyehatkan sistem perbankan. Kebiijakan penjaminan terhadap jumlah simpanan nasabah perbankan pada tahun 1998 dengan tanpa batasan (blanket guarantee) mengembalikan kepercayaan masyarakat terhadap perbankan, namun disisi lain jaminan tersebut juga menimbulkan risiko moral hazard bagi perbankan. Keberadaan LPS mengakhiri sistem penjaminan simpanan tanpa batas dengan membatasi penjaminan dalam bentuk limit penjaminan simpanan dan suku bunga yang dijamin yang dikenal dengan suku bunga LPS. Artikel ini mencoba memaparkan dan menganlisa proses institusionalisasi dan proses tata kelola (governance) pada sistem penjaminan simpanan di Indonesia. Hasilnya menunjukkan bahwa proses institusionalisasi sistem penjaminan simpanan di Indonesia dilakukan secara bertahap dengan menilai risk taking perbankan dan persepsi masyarakat terhadap industri perbankan di Indonesia. Dalam proses tata kelola, LPS menjalankan fungsinya sebagai penjamin simpanan deposan, LPS bertugas menetapkan dan merumuskan kebijakan pelaksanaan penjaminan simpanan serta melaksanakan penjaminan simpanan. LPS melakukan pembayaran klaim penjaminan kepada deposan dari bank yang dicabut izin usahanya sepanjang telah memenuhi persyaratan yang telah ditetapkan oleh UU LPS.   Kata kunci: Lembaga Penjamin Simpanan, Institusionalisasi, Tata Kelola.

scholarly journals Information Disclosure in China’s Rising Securitization Market

2021 ◽  
Vol 9 (4) ◽  
pp. 66
Author(s):  
Xueer Chen ◽  
Chao Wang
Keyword(s):  
Moral Hazard ◽  
Adverse Selection ◽  
Financial Institutions ◽  
Information Disclosure ◽  
Financial Stability ◽  
Banking Sector ◽  
Information Transparency ◽  
Internet Finance ◽  
The Government ◽  
Market Needs

E-commerce and FinTech are currently booming in China. The growing consumer market is accompanied by internet finance, by which consumers can easily borrow money from financial institutions online. As a result, the growing risks of financial institutions are of concern to the government and regulatory bodies. Consequently, the securitization market in China is seeing rapid growth that could affect financial stability. Applying FinTech and emerging technologies in securitization might be an effective way to protect against these risks. This paper studies the question of whether China needs a higher standard of information transparency in order to protect against its risks against the background of digital transformation. We analyzed the determinants of securitization in the Chinese banking sector, relying on data on banks for two periods: pre-2017Q4 and post-2017Q4. The main findings of the paper demonstrate that the application of FinTech in China’s banking industry resulted in less information asymmetry. The risk exposure was the most significant determinant in general. Higher risk exposures increased securitization transaction volumes, which reflects securitization with adverse selection problems between the originator and investors. Liquidity and profitability, as important determinants indicating the moral hazard problem, also affected securitization pre-2017Q4, but liquidity and profitability were found to be unimportant determinants after the application of FinTech (the post-2017Q4 period). Moreover, this study finds that the effects of the adverse selection and moral hazard problems varied in different types of banks. Overall, our findings suggest that the Chinese securitization market needs a higher standard of information transparency.

scholarly journals The Effect of Bank Supervision and Examination on Risk Taking: Evidence from a Natural Experiment

2020 ◽  
Author(s):  
John Kandrac ◽  
Bernd Schlusche
Keyword(s):  
Financial Institutions ◽  
Risk Taking ◽  
Natural Experiment ◽  
Causal Effect ◽  
Insurance Fund ◽  
Additional Risk ◽  
Bank Supervision ◽  
Asset Growth ◽  
The Government ◽  
Bad Assets

Abstract We exploit an exogenous reduction in bank supervision and examination to demonstrate a causal effect of supervisory oversight on financial institutions’ risk taking. The additional risk took the form of risky lending, faster asset growth, and a greater reliance on low-quality capital. This response to less oversight boosted banks’ odds of failure. Lastly, we show that the reduction in oversight capacity led to more costly failures because there were longer delays in closing insolvent institutions, and because more bad assets were passed to the government insurance fund.

Financial Stability, Systemic Risk, and Taxpayers’ Money—The Rationale for a Special Resolution Regime

2016 ◽  
Author(s):  
Michael Schillig
Keyword(s):  
Moral Hazard ◽  
Market Efficiency ◽  
Financial Institutions ◽  
Systemic Risk ◽  
Financial Stability ◽  
Financial System ◽  
System Stability ◽  
Cross Border ◽  
Ex Post ◽  
Ex Ante

Special resolution regimes are generally introduced with the objective of helping to ‘maintain financial stability, minimize systemic risk, protect consumers, limit moral hazard and promote market efficiency’. The recurring themes are financial stability, systemic risk, and taxpayers’ exposure to losses. This chapter explores whether and to what extent a special resolution regime for banks and financial institutions can contribute to the enhancement of financial (system) stability and can limit systemic risk. It seeks to clarify these concepts and discusses possible ex ante incentives that a (recovery and) resolution regime may provide for controlling systemic risk. Further, it focuses on ex post remedies for the curtailment of systemic risk, and considers the international and cross-border implications.

scholarly journals A Schematic View of Government as a Regulator and Insurer of the Financial System

2021 ◽  
Vol 7 (2) ◽  
pp. p54
Author(s):  
Henri-Paul Rousseau
Keyword(s):  
Central Bank ◽  
Financial Institutions ◽  
Public Debt ◽  
Financial Crises ◽  
Financial System ◽  
Financial Sector ◽  
The Government ◽  
High Level ◽  
Over Time

The purpose of this paper is to present a schematic of the interactions between the government as the REGULATOR of financial institutions and the government as the INSURER of financial institutions while considering the long-term feedback relationships between the size and the scope of the financial sector and the level of public debt resulting from financial crises over time. The analysis concludes that at certain high level of public debt and size of the expected support of the financial sector by the government, the regulator and/or the central bank may have to “stabilize” the situation, but there may be cases where the support becomes socially “unacceptable”.

Domestic Resource Mobilisation: A Structural Approacb

1993 ◽  
Vol 32 (4II) ◽  
pp. 1067-1078
Author(s):  
Saleem M. Khan
Keyword(s):  
Economic Growth ◽  
Financial Institutions ◽  
Foreign Assistance ◽  
High Rate ◽  
Domestic Saving ◽  
Capital Investments ◽  
External Resources ◽  
Private And Public ◽  
The Government ◽  
Enhance Efficiency

The Mobilisation of domestic resources and their efficient utilisation are two of the most crucial tasks in revitalising the economy of Pakistan. Historically, low saving fotmation and relatively higher targets of investment and economic growth made it imperative to depend on external resources. Despite heavy domestic borrowing from both private and public sectors, there still has remained an unmet resource gap that has necessitated dependence on foreign capital. I In recent years, the sources of foreign assistance have become scarce due to a growing shortage in world saving and growing domestic demand for budget appropriations in the western countries. If economic growth in Pakistan is to be sustained and selfgenerating, investment in physical and human development must be increased and mad more efficient. To meet this challenge, most of the capital will have to come from domestic sources. Hence, the focus of this paper is on harnessing domestic efforts to increase saving formation and to enhance efficiency of capital investments. Traditionally, the government of Pakistan has relied on conventional approaches to increasing domestic saving. First, the government has been encouraging greater saving by the private sector through a package of national saving schemes and by allowing financial institutions to introduce saving incentives. Saving-schemes and saving incentives have not produced satisfying results. Table 1 shows saving and investment in selected South Asian countries. Saving in Pakistan is very low and, indeed, among the lowest even when compared with neighbouring and other developing countries. Explanations of this failure include the low levels of income and high rate of inflation in the country.2 Moreover, the financial institutions have in general remained inefficient.

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