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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.
The Growth Dynamics of Bank Lending and P2P Lending: Cream Screaming or Bottom Fishing?
1Frankfurt School of Finance and Management; 2Goethe University Frankfurt; 3Washington University in St. Louis
We develop a theoretical model to examine the interaction between bank lending and lending via peer-to-peer (P2P) lending platforms. The model predicts that: (i) banks prefer relationship lending loans over transaction loans and improve performance by avoiding transaction costs; (ii) transaction loans migrate to P2P lending platforms, so the emergence of P2P lending is correlated with a decline in bank lending; and (iii) the risk-adjusted interest rates on P2P loans are lower than those on bank loans. We confront these predictions with data on P2P lending and non-construction consumer bank credit market in Germany. The empirical findings support predictions of the model and indicate that riskier borrowers seeking transaction loans are the ones being served by P2P lending.
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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