Search results for: Author=Hellwig [244]

Pages

2011
Quo vadis, Euroland? European Monetary Union Between Crisis and Reform
Life in the Eurozone with or without sovereign default?
59-76
FIC Press Wharton Financial Institutions Center
Philadelphia
2011
Quo vadis, Euroland? European Monetary Union between Crisis and Reform
2011/12
Max Planck Institute for Research on Collective Goods
Bonn
2011
Abstract
This lecture discusses the 2010 crisis of the European Monetary Union and draws some lessons for reform. Crisis resolution has been difficult because the sovereign debt crisis of countries like Greece and Portugal has come together with real-estate and banking crises in countries like Ireland and Spain and bank vulnerability in countries like Germany and France. Failure to disentangle and resolve the different crises prevents a satisfactory approach to the long-term reform of governance of sovereign borrowing and banking. Any such reform must find a substitute for the discipline that exchange rate mechanisms impose on sovereign borrowers and their lenders when the currency is national. Any mechanism for imposing discipline on sovereign borrowers and their lenders must be designed so that enforcement is credible even in a crisis. Recommendations for reform include (i) an inclusion of sovereign exposure from too-big-to-fail concerns in banking in monitoring of fiscal stance, (ii) independence of bank supervisors from their respective political authorities, and (iii) a strengthening of the powers of the European Supervisory Authorities over the national supervisors.
2010
A Generalization of the Atkinson-Stiglitz (1976) Theorem on the Undesirability of Nonuniform Excise Taxation
Economics Letters
108
156-158
2010
Banken sollten 20 % mehr Eigenkapital halten, Interview
Basler Zeitung, Finanz und Wirtschaft
2010
Capital Regulation after the Crisis: Business as Usual?
2010/31
Max Planck Institute for Research on Collective Goods
Bonn
2010
Abstract
The paper discusses the reform of capital regulation of banks in the wake of the financial crisis of 2007/2009. Whereas the Basel Committee on Banking Supervision seems to go for marginal changes here and there, the paper calls for a thorough overhaul, moving away from risk calibration and raising capital requirements very substantially. The argument is based on the observation that the current system of risk-calibrated capital requirements, in particular under the model-based approach, played a key role in allowing banks to be undercapitalized prior to the crisis, with strong systemic effects for deleveraging multipliers and for the functioning of interbank markets. The argument is also based on the observation that the current system has no theoretical foundation, its objectives are ill-specified, and its effects have not been thought through, either for the individual bank or for the system as a whole. Objections to substantial increases in capital requirements rest on arguments that run counter to economic logic or are themselves evidence of moral hazard and a need for regulation.
Capital Regulation after the Crisis: Business as Usual?
CESifo DICE Report
8
2
40-46
2010
Comments on: Proposal to ensure the loss absorbency of regulatory capital at the point of non-viability, Consultative Document
Basel Committee on Banking Supervision
2010
Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity is Not Expensive
2010/42
Max Planck Institute for Research on Collective Goods
Bonn
2010
Abstract
We examine the pervasive view that “equity is expensive,” which leads to claims that high capital requirements are costly and would affect credit markets adversely. We find that arguments made to support this view are either fallacious, irrelevant, or very weak. For example, the return on equity contains a risk premium that must go down if banks have more equity. It is thus incorrect to assume that the required return on equity remains fixed as capital requirements increase. It is also incorrect to translate higher taxes paid by banks to a social cost. Policies that subsidize debt and indirectly penalize equity through taxes and implicit guarantees are distortive. Any desirable public subsidies to banks’ activities should be given directly and not in ways that encourage leverage. Finally, suggestions that high leverage serves a necessary disciplining role are based on inadequate theory lacking empirical support. We conclude that bank equity is not socially expensive, and that high leverage is not necessary for banks to perform all their socially valuable functions, including lending, taking deposits and issuing money-like securities. To the contrary, better capitalized banks suffer fewer distortions in lending decisions and would perform better. The fact that banks choose high leverage does not imply that this is socially optimal, and, viewed from an ex ante perspective, high leverage may not even be privately optimal for banks. Setting equity requirements significantly higher than the levels currently proposed would entail large social benefits and minimal, if any, social costs. Approaches based on equity dominate alternatives, including contingent capital. To achieve better capitalization quickly and efficiently and prevent disruption to lending, regulators must actively control equity payouts and issuance. If remaining challenges are addressed, capital regulation can be a powerful tool for enhancing the role of banks in the economy.
Finanzkrise und Reformbedarf [The Financial Crisis and Regulatory Reform]
2010/19
Max Planck Institute for Research on Collective Goods
Bonn
2010
Abstract
The report provides an analysis of the financial crisis of 2007/2008 and draws some conclusions about the need for regulatory reform. The analysis ascribes the crisis not only to problems in subprime mortgage lending and securitization, but also to excessive maturity transformation and overindebtedness of financial institutions and to flaws in financial system architecture. Because of these flaws, the initial shocks of August 2007 induced a self-supporting downward spiral in financial markets and financial institutions, which only ended in October 2008 when taxpayers were forced to provide guarantees for financial institutions. The first part of the paper provides an in-depth analysis of developments in subprime mortgage lending and securitization, focusing on problems of security design and governance, and lack of external discipline from rating agencies or investors. The second part discusses maturity transformation and excessive indebtedness and their implications for the fragility of individual institutions as well as the system as a whole. Systemic fragility is seen as a result of the interplay of price declines in malfunctioning markets, fair value accounting, an insufficiency of bank equity, and regulation induced or market induced deleveraging, putting further pressure on markets and prices. The third part of the paper goes through the different causes of adverse developments, with a distinction between individual misbehavior and systemic flaws. Among systemic flaws, the paper discusses governance problems in mortgage origination and securitization as well as banking and shortcomings of regulation, in particular, capital regulation under the model-based approach. Reform proposals concern capital regulation, liability and remuneration of bank management, procedures for dealing with banks in difficulties, and insolvency law. The latter two subjects are introduced in order to reduce the scope for submitting government to blackmail by banks in difficulties.