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Published / Preprint: Financial Markets and Economic Growth*

April 6, 2012 by MoneyScience   Comments (0)

In this reprinting of the Nobel Prize‐winning financial economist's classic statement about the origins of financial crises, the Southeast Asian crisis of the late 1990s is attributed “not to too much reliance on financial markets, but to too little.” Like the U.S. economy a century ago, the emerging Asian economies did not then—and do not now—have well‐developed capital markets and remain heavily dependent on their banking systems to finance growth. But for all its benefits,...

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Published / Preprint: A Look Back at Merton Miller's âFinancial Markets and Economic Growthâ

April 6, 2012 by MoneyScience   Comments (0)

The author begins by agreeing with Miller's characterization of the fragility of U.S. banks and of the shortcomings of the Asian model of bank finance‐driven growth. The article also expresses “emphatic agreement” with Miller's arguments that the protection of banks through deposit insurance, regulatory forbearance, and other forms of “bailout” have created costly moral‐hazard problems that encourage excessive risk‐taking. And the author endorses, at least in principle, Miller's...

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Published / Preprint: Liquidity, the Value of the Firm, and Corporate Finance*

April 6, 2012 by MoneyScience   Comments (0)

The theory of corporate finance has been based on the idea that a company's market value is determined mainly by just two variables: the company's expected aftertax operating cash flows or earnings, and the risk associated with producing them. The authors argue that there is another important factor affecting a company's value: the liquidity of its own securities, debt as well as equity. The paper supports this argument by reviewing the large and growing body of evidence showing that...

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Published / Preprint: Getting the Right Mix of Capital and Cash Requirements in Prudential Bank Regulation*

April 6, 2012 by MoneyScience   Comments (0)

Cash reserve requirements are useful as a broadly conceived prudential tool, not just as a narrowly focused means of limiting the risks associated with illiquidity. Indeed, illiquidity risk is neither a necessary nor a sufficient condition for establishing bank liquidity requirements. The primary means of mitigating the systemic costs of bank illiquidity risk is the creation of an effective lender of last resort (LOLR). But instead of focusing narrowly on bank funding risks when designing...

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Published / Preprint: CARE/CEASA Roundtable on: Liquidity and Capital Management

April 6, 2012 by MoneyScience   Comments (0)

Five distinguished banking and accounting scholars explore the role of liquidity at not only the “macro” level of the economy, but also at the level of individual companies. The first of the four main speakers, who is the author of the preceding article, restates his argument that the stability of financial systems can be increased by directing bank regulators and executives to find the optimal combination of liquidity and capital requirements. The second of the four speakers shifts the...

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Published / Preprint: Statement of the Financial Economists Roundtable: How to Manage and Help to Avoid Systemic Liquidity Risk

April 6, 2012 by MoneyScience   Comments (0)

In the summer of 2010, when legislative and regulatory responses were being finalized to address financial institution and market liquidity problems, the Financial Economists Roundtable, a group of prominent financial economists over 50 years old, convened with the aim of developing principles that would address both market‐wide and institution‐specific liquidity problems exposed by the 2007–2008 financial crisis. As summarized in this statement, the eight principles that came out of this...

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Published / Preprint: Clearing and Collateral Mandates: A New Liquidity Trap?

April 6, 2012 by MoneyScience   Comments (0)

All too often, legislative solutions to some financial crisis have serious consequences that are both unwanted and unintended. The author of this article foresees several possible negative consequences arising from Title VII of the Dodd‐Frank Act, which mandates that eligible derivatives be cleared through central counterparties (CCPs) that require initial and variation margin. The new legislation also requires that the remaining non‐cleared derivatives that are traded by some market...

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