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BIS-1: Financial Innovation and Changes in Markets' Infrastructure
Central Counterparty Capitalization and Misaligned Incentives
Vrije Universiteit Amsterdam
Central Counterparties (CCPs) are systemic nodes in financial markets. Incentive regulation on CCPs becomes crucial for financial stability. I investigate incentives and optimal regulation of a profit-driven CCP with limited liability. Conditional on available capital, the CCP fine-tunes collateral requirements to balance fee incomes against counterparty risk. High collateral reduces potential default losses, but leads to foregone profitable trades. Limited liability creates a wedge between the CCP’s collateral policy and the socially optimal solution to this trade-o. However, regulators can use capital requirements to close the wedge, unless clearing fee exceeds a threshold.
P2P Lenders versus Banks: Cream Screaming or Bottom Fishing?
1Frankfurt School of Finance and Management; 2Goethe University Frankfurt; 3Washington University in St. Louis
We develop a simple theoretical model to motivate testable hypotheses about the interaction between bank lending and lending via peer-to-peer (P2P) lending platforms. The model predicts that: (i) P2P loans are riskier than relationship loans; (ii) the risk-adjusted interest rates on P2P loans are lower than those on bank loans; and (iii) the emergence of P2P lending causes a decline in bank lending, and this decline is the greatest in areas where banks face the higher regulatory costs. We confront these predictions with data on P2P lending and non-construction consumer bank credit market in Germany, utilizing exogenous shock to the capital requirements of some banks to provide causal evidence on the capital requirements. The empirical findings support the predictions of the model.
1University of Toronto; 2Université Paris-Dauphine
Blockchain technology allows for flexible settlement of trades. We build a model of intermediated trading with search frictions and counterparty risk. On the one hand, longer trade-to-settlement time increases counterparty risk exposure. On the other hand, liquidity improves since intermediaries have more time to adjust inventories. Optimal time-to-settlement decreases in counterparty risk and search intensity. However, with flexible time-to-settlement intermediaries specialize in either high- or low-default risk contracts. Consequently, price competition is relaxed. Intermediaries earn rents, increasing in their (common) default rate due to larger scope for specialization. A unique time-to-settlement for all trades in a given security improves welfare.
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Conference: EFA 2017
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