Rules, Discretion, and Macro-Prudential Policy. By Itai Agur and Sunil Sharma
March 08, 2013
IMF Working Paper No. 13/65
http://www.imf.org/external/pubs/cat/longres.aspx?sk=40379.0
Summary: The paper examines the implementation of macro-prudential policy. Given the coordination, flow of information, analysis, and communication required, macro-prudential frameworks will have weaknesses that make it hard to implement policy. And dealing with the political economy is also likely to be challenging. But limiting discretion through the formulation of macro-prudential rules is complicated by the difficulties in detecting and measuring systemic risk. The paper suggests that oversight is best served by having a strong baseline regulatory regime on which a time-varying macro-prudential policy can be added as conditions warrant and permit.
Friday, March 8, 2013
Tuesday, March 5, 2013
Reef and Relations: Is the Philippines-US Alliance Finally Maturing? By Julio S. Amador III
Reef and Relations: Is the Philippines-US Alliance Finally Maturing? By Julio S. Amador III
Washington, D.C.: East-West Center. February 26, 2013
Asia Pacific Bulletin, No. 202
http://www.eastwestcenter.org/publications/reef-and-relations-the-philippines-us-alliance-finally-maturing
Julio S. Amador III, Foreign Affairs Research Specialist at the Foreign Service Institute of the Philippines, explains that the recent grounding in Filipino waters of the USS Guardian, "[s]hows just how delicate managing alliances can be, and the response by the Filipino and US governments also demonstrates a level of maturity in managing the issue."
Excerpts:
Washington, D.C.: East-West Center. February 26, 2013
Asia Pacific Bulletin, No. 202
http://www.eastwestcenter.org/publications/reef-and-relations-the-philippines-us-alliance-finally-maturing
Julio S. Amador III, Foreign Affairs Research Specialist at the Foreign Service Institute of the Philippines, explains that the recent grounding in Filipino waters of the USS Guardian, "[s]hows just how delicate managing alliances can be, and the response by the Filipino and US governments also demonstrates a level of maturity in managing the issue."
Excerpts:
The two countries have had a long history of working together and the military aspect of the alliance is an important facet of the overall relationship, but further cooperation in other areas should be emphasized and supported. The incident in Tubbataha opens up a new opportunity to cooperate on environmental protection, which is an issue that strikes a chord among citizens of both countries. Already, there are reports that the US government is willing to provide additional assistance including radar and communications equipment to help the Philippines’ reef rangers and coast guard improve their capacity to protect Tubbataha. This would be of great value in ensuring the reef’s survival. Further collaboration should be encouraged such as scientific partnerships between marine science institutions in the United States and the Philippines, environmental tourism, and investment in coral reef conservation.
Protocols that cover US naval movements near protected areas could also be adopted so that future accidents can be avoided. As a result of this incident, such a move could allay any fears that the United States is running roughshod over the Philippines. Acknowledging local expertise and information should also be something that US naval officers take into consideration when navigating through Philippine waters. On the Philippine side, coordination among the various government agencies involved should be emphasized so that there are no conflicting messages. A
lead agency should be designated that addresses this issue on behalf of the government. A comprehensive rehabilitation plan for Tubbataha also needs to be developed to showcase how serious both two sides are in managing the aftermath of the incident.
Going forward, managing the alliance should not be too difficult for the Philippines and the United States, as both states have a long history of working and cooperating together. That does not detract from the fact that US officials should be more respectful of Philippine navigational laws and restrictions regarding its sovereign territory. Nor should it make the Philippine side complacent with regard to implementing its environmental laws. However, what this incident illustrates is the capacity of the allies to be more mature in managing a potentially serious diplomatic incident.
That the United States has already acknowledged some responsibility is an indication of its respect towards its ally. The Philippine side, meanwhile, has demonstrated a pragmatic and principled stance to an otherwise incendiary issue; thus, the government’s ability to be firm with regard to the implementation of its environmental laws and its capacity to separate this issue from the military relationship is commendable.
How the two allies will work together after this incident will be a good indication of the maturity and future direction of the alliance. Looking at the current situation, the outlook is positive.
Sunday, March 3, 2013
In Defense of the CEO. By Ray Fisman and Tim Sullivan
In Defense of the CEO. By Ray Fisman and Tim Sullivan
The Wall Street Journal, January 12, 2013, on page C1
Chauffeur-driven limousines, millions in stock options, golden parachutes. It's no wonder bosses' pay and perks can rankle. Here's why the best ones are worth it.
http://online.wsj.com/article/SB10001424127887324081704578233601161769648.html
A $90,000 area rug, a pair of guest chairs that cost almost as much, a $35,000 commode and a $1,400 trash can—these are just a few of the expenses from a remodeling of John Thain's office when he took over as Merrill Lynch's chief executive officer in December 2007. The total bill came to an astonishing $1.2 million—about the price of five average single-family homes.
Those same remodeling expenses contributed to Mr. Thain's resignation just over a year later, after Bank of America BAC bought Merrill, and helped to define the popular image of the CEO as someone who lives a life of extreme privilege: gold-plated faucets, country club memberships and chauffeur-driven limousines, all paid for through corporate largess. Mr. Thain's limo tab included $230,000 for his driver—$85,000 in salary, the rest in overtime and a bonus. This was on top of Mr. Thain's receiving a reported $78 million in compensation for 2007.
It's easy to get upset about perks and pay packages like Mr. Thain's. But even in the face of public and investor outrage, CEO salaries are still on the rise. Progress Energy's CEO Bill Johnson received a $44 million payout when he left the company after its merger with Duke Energy DUK last year, and Abercrombie CEO Michael Jeffries took home over $48 million in 2011—while the company's stock price tanked.
Excessive, decadent? That's a hard call to make without having some idea of what a CEO does. Many CEOs are overpaid or, even worse, paid for incompetence. Still, you can only appreciate the difference between pay-for-performance and pay-for-incompetence by first understanding the CEO's job.
Let's start with the basics: how chief executives spend their time. Among the first researchers to give us a glimpse into the day-to-day life of the CEO was management guru Henry Mintzberg, who followed a handful of business leaders for his Ph.D. thesis at the MIT Sloan School of Management over four decades ago. He discovered that, first and foremost, CEOs go to meetings. Lots of them—it is where his research subjects spent over 80% of their work hours.
The astonishing thing is that the percentage of time CEOs spend in meetings has hardly shifted in four decades, despite innovations like email. A study conducted last year by Oriana Bandiera of the London School of Economics, with Columbia's Andrea Prat and Harvard's Raffaella Sadun, assembled time diaries for hundreds of Indian CEOs. (With other collaborators, they have done similar research on smaller samples of Italian and American executives.)
Unlike Dr. Mintzberg—who did the legwork himself—this group of researchers asked the CEOs' executive assistants to record in 15-minute increments how their bosses allocated their time over the course of a week. Were they working alone or in a group? If in a meeting, how many were in attendance? Was the meeting with employees or with outsiders, via telephone or in person? Despite the vastly different geographies and eras—and differences in customers, products and size of organizations—the CEOs all spent their time in much the same way: in face-to-face interaction.
That time is often marked by interruption. In the five weeks of Dr. Mintzberg's study, he recorded extraordinarily few instances of a CEO alone and without disruption for more than 15 minutes straight. Half their activities lasted fewer than nine minutes—and this was in the pre-BlackBerry age—while only 10% went on for more than an hour. Those hourlong stretches were taken up primarily with hourlong meetings. The more recent studies have found a similar pace of interruption.
Yet saying that the job of someone like Jeff Bezos consists of going to lots of meetings is a bit like saying that Shakespeare wrote words. True, but pretty thin for explaining what made, say, Steve Jobs Steve Jobs.
Meetings remain the focus of the CEO's day because such personal interactions are critical to learning the information necessary to run a company effectively. After all, one of the most important jobs of managers is to decide what information gets passed up through the chain of command. If CEOs were to rely solely on written reports and data sheets from self-serving underlings, they almost would be guaranteed to make the wrong decisions. What manager wants to pass on bad news—so much easier to do in a report than when you're being questioned in detail by your boss? This very problem was at the root of Toyota's response to its problems in 2009 with sudden, unexpected acceleration in its vehicles: Managers were all too willing to paint a rosy picture for the CEO, which hampered his ability to direct the company to respond appropriately.
Harvard Business School professors Michael Porter and Nitin Nohria argue that the skill to extract from underlings the critical details that are needed to inform top-level decisions is part of what makes the best CEOs better than their peers. It works in reverse too. The information the CEO needs to convey is just as prone to being misrepresented and misinterpreted as it works its way through a corporation, across shareholders and among customers. So, in the vast majority of meetings, CEOs are not just uncovering information but also constantly refining their message.
Consider, for instance, founder Tony Hsieh's drumbeat in referring to Zappos as a "service company that just happens to sell shoes." Meetings give him the opportunity to let his stakeholders know exactly what he means. The company hit its billion-dollar sales goal two years before schedule, in 2008, and was acquired by Amazon.com in 2009 for a reported $1.2 billion.
The Porter-Nohria view is backed up by the data. In their time-use study of 354 Indian CEOs—still a work-in-progress—the researchers collected detailed information on the nature of CEOs' meetings, including who attended. Two dominant management styles emerged. "Style 1" leaders, in their taxonomy, spend most of their time meeting with employees; they also tend to hold larger meetings and to include people from a wider set of departments within the organization. "Style 2" CEOs are more apt to spend their time alone, in one-on-one interaction, and outside rather than inside the firm.
Though the researchers are still putting together their findings, they have observed that the first management style, which is inclusive and cross-functional, is typical of CEOs at companies that are more efficiently run and more profitable.
Why don't all CEOs adopt Style 1? It's likely that part of the story is ability: not everyone is up to the task of dealing with the complexities of a bigger conference room filled with disparate participants. It may also reflect a CEO's decision to devote less attention to the company than to cultivating his outside image. In a 2009 study, Ulrike Malmendier of the University of California, Berkeley, and UCLA's Geoff Tate found that companies performed poorly after their leaders were voted "CEO of the Year," because of the distractions that came with the fame, like writing a book and hobnobbing at Davos. A truly great CEO cannot be distracted; she must remain a great intelligence gatherer, a great communicator and ultimately a great decider, and meetings are one of her most important tools.
The existence of great CEOs does not mean, of course, that the average one deserves his millions—although CEOs, never known for their modesty, may think they do. When Dow Jones reporter Kaveri Niththyananthan questioned the CEO of U.K.-based EasyJet, Andy Harrison, about his 2009 compensation of nearly $4.5 million, Mr. Harrison smiled and replied, "I'm worth it." When a congressman suggested to Ford CEO Alan Mulally that he should take a salary of one dollar, given the near-bankrupt state of the U.S. auto industry, Mr. Mulally replied, "I think I am OK where I am"—this in a year when he took home nearly $17 million in compensation. (Mr. Mulally seems to know the value of meetings; he has listed "You learn from everybody" as one of the key attributes of great CEOs.)
What Messrs. Harrison and Mulally no doubt had in mind were their companies' profit numbers. Profits had fallen by 64% the year Mr. Harrison claimed to be worth his millions, but he could point to five straight years of profits as EasyJet CEO—a rare achievement in the airline business. Mr. Mulally's $17 million payday came on the heels of a billion-dollar turnaround that transformed a $970 million loss at Ford into profits of nearly $700 million just a year later.
But are CEOs really so much smarter (and better at running meetings) than the rest of us? Possibly, but that's not the right question to ask. To claim they're worth it, CEOs don't actually have to be all that much better than the runner-up for the job.
In "superstar economies," as in the market for CEOs, even a slight edge in ability can translate into enormous payoffs. That's why Major League Baseball pitchers earn so much more than triple-A players, despite throwing fastballs only a couple of miles an hour faster. When the stakes are in the billions, shareholders should be more than happy to sign off on a multimillion-dollar paycheck, even if the recipient is just slightly better than the next best option.
By the same token, if CEOs' decisions have such a disproportionate impact on corporate profits, you might be willing to pay a lot to motivate them to put in extra hours in the office. And this view helps to explain—if not always to justify—many of the privileges that come with a corner office: the corporate jet that gives CEOs more face time with employees in different locales; the chauffeured limo that frees up time during the morning commute.
As for another controversial perk, what could possibly be the point of paying CEOs for getting fired? The so-called golden parachute goes back to a perfectly reasonable attempt to get CEOs to create even more value for their companies. Introduced by TWA in 1961, the practice took off during the merger wave of the 1980s, when executives started pondering whether it was smarter to seek out merger opportunities to make money for shareholders or to hold on to their jobs. Mostly they opted for keeping their jobs, often to the detriment of the stock price.
As a result, shareholders gave CEOs an escape valve that, the reasoning went, would encourage them to work in the long-term interests of their companies. Even one of the fiercest critics of CEO compensation, Harvard Law School's Lucian Bebchuk, reports in recent research with Alma Cohen and Charles Wang that golden parachutes do motivate CEOs to find merger-and-acquisition opportunities and, as a result, to extract more takeover premiums for shareholders.
So maybe we should be a bit more understanding of Gillette's board, which awarded a severance package worth well over $160 million to CEO James Kilts after the company was acquired by Procter & Gamble in 2005, in what Gillette shareholder Warren Buffett called a "dream deal." (And Merrill's Mr. Thain? He oversaw the company's acquisition by Bank of America at the height of the financial meltdown, a deal that remains shrouded in controversy, in part as a result of $4 billion in 11th-hour bonuses handed out in December 2008. By the time the dust cleared, Mr. Thain walked away with a seemingly modest $1.5 million severance package.)
Yet executives whose ineptitude or laziness makes their companies ripe for takeover also get rewarded sometimes. Indeed, Prof. Bebchuk's study finds that companies where executives are protected by golden parachutes generally trade at lower levels than those where CEOs don't have them. But how should we think about such pay-for-incompetence? Instead of shaking our heads at the injustice, we can consider it an unfortunate side effect of well-motivated incentives. Designing severance packages more carefully is a worthy idea, but simply eradicating them could do real damage.
Before joining the shareholder activists calling for CEOs to be held accountable and stripped of their more obvious excesses, it's worth pausing to think about why those perks exist in the first place. Sometimes it's the result of slick managers who have co-opted their boards, but sometimes it's simply that we can't easily distinguish good CEOs from bad ones before the employment contract is signed. Seeing CEOs make millions for being fired—and even for losing money—may be hard to stomach, but it is collateral damage in the economics of motivating them to run their companies well.
—Messrs. Fisman and Sullivan are the authors of "The Org: The Underlying Logic of the Office," published this month by Twelve.
Corrections & Amplifications
The remodeling of John Thain's office at Merrill Lynch in 2007 included a $35,000 commode (a piece of furniture). An earlier version of this article said the project included a $35,000 toilet.
The Wall Street Journal, January 12, 2013, on page C1
Chauffeur-driven limousines, millions in stock options, golden parachutes. It's no wonder bosses' pay and perks can rankle. Here's why the best ones are worth it.
http://online.wsj.com/article/SB10001424127887324081704578233601161769648.html
A $90,000 area rug, a pair of guest chairs that cost almost as much, a $35,000 commode and a $1,400 trash can—these are just a few of the expenses from a remodeling of John Thain's office when he took over as Merrill Lynch's chief executive officer in December 2007. The total bill came to an astonishing $1.2 million—about the price of five average single-family homes.
Those same remodeling expenses contributed to Mr. Thain's resignation just over a year later, after Bank of America BAC bought Merrill, and helped to define the popular image of the CEO as someone who lives a life of extreme privilege: gold-plated faucets, country club memberships and chauffeur-driven limousines, all paid for through corporate largess. Mr. Thain's limo tab included $230,000 for his driver—$85,000 in salary, the rest in overtime and a bonus. This was on top of Mr. Thain's receiving a reported $78 million in compensation for 2007.
It's easy to get upset about perks and pay packages like Mr. Thain's. But even in the face of public and investor outrage, CEO salaries are still on the rise. Progress Energy's CEO Bill Johnson received a $44 million payout when he left the company after its merger with Duke Energy DUK last year, and Abercrombie CEO Michael Jeffries took home over $48 million in 2011—while the company's stock price tanked.
Excessive, decadent? That's a hard call to make without having some idea of what a CEO does. Many CEOs are overpaid or, even worse, paid for incompetence. Still, you can only appreciate the difference between pay-for-performance and pay-for-incompetence by first understanding the CEO's job.
Let's start with the basics: how chief executives spend their time. Among the first researchers to give us a glimpse into the day-to-day life of the CEO was management guru Henry Mintzberg, who followed a handful of business leaders for his Ph.D. thesis at the MIT Sloan School of Management over four decades ago. He discovered that, first and foremost, CEOs go to meetings. Lots of them—it is where his research subjects spent over 80% of their work hours.
The astonishing thing is that the percentage of time CEOs spend in meetings has hardly shifted in four decades, despite innovations like email. A study conducted last year by Oriana Bandiera of the London School of Economics, with Columbia's Andrea Prat and Harvard's Raffaella Sadun, assembled time diaries for hundreds of Indian CEOs. (With other collaborators, they have done similar research on smaller samples of Italian and American executives.)
Unlike Dr. Mintzberg—who did the legwork himself—this group of researchers asked the CEOs' executive assistants to record in 15-minute increments how their bosses allocated their time over the course of a week. Were they working alone or in a group? If in a meeting, how many were in attendance? Was the meeting with employees or with outsiders, via telephone or in person? Despite the vastly different geographies and eras—and differences in customers, products and size of organizations—the CEOs all spent their time in much the same way: in face-to-face interaction.
That time is often marked by interruption. In the five weeks of Dr. Mintzberg's study, he recorded extraordinarily few instances of a CEO alone and without disruption for more than 15 minutes straight. Half their activities lasted fewer than nine minutes—and this was in the pre-BlackBerry age—while only 10% went on for more than an hour. Those hourlong stretches were taken up primarily with hourlong meetings. The more recent studies have found a similar pace of interruption.
Yet saying that the job of someone like Jeff Bezos consists of going to lots of meetings is a bit like saying that Shakespeare wrote words. True, but pretty thin for explaining what made, say, Steve Jobs Steve Jobs.
Meetings remain the focus of the CEO's day because such personal interactions are critical to learning the information necessary to run a company effectively. After all, one of the most important jobs of managers is to decide what information gets passed up through the chain of command. If CEOs were to rely solely on written reports and data sheets from self-serving underlings, they almost would be guaranteed to make the wrong decisions. What manager wants to pass on bad news—so much easier to do in a report than when you're being questioned in detail by your boss? This very problem was at the root of Toyota's response to its problems in 2009 with sudden, unexpected acceleration in its vehicles: Managers were all too willing to paint a rosy picture for the CEO, which hampered his ability to direct the company to respond appropriately.
Harvard Business School professors Michael Porter and Nitin Nohria argue that the skill to extract from underlings the critical details that are needed to inform top-level decisions is part of what makes the best CEOs better than their peers. It works in reverse too. The information the CEO needs to convey is just as prone to being misrepresented and misinterpreted as it works its way through a corporation, across shareholders and among customers. So, in the vast majority of meetings, CEOs are not just uncovering information but also constantly refining their message.
Consider, for instance, founder Tony Hsieh's drumbeat in referring to Zappos as a "service company that just happens to sell shoes." Meetings give him the opportunity to let his stakeholders know exactly what he means. The company hit its billion-dollar sales goal two years before schedule, in 2008, and was acquired by Amazon.com in 2009 for a reported $1.2 billion.
The Porter-Nohria view is backed up by the data. In their time-use study of 354 Indian CEOs—still a work-in-progress—the researchers collected detailed information on the nature of CEOs' meetings, including who attended. Two dominant management styles emerged. "Style 1" leaders, in their taxonomy, spend most of their time meeting with employees; they also tend to hold larger meetings and to include people from a wider set of departments within the organization. "Style 2" CEOs are more apt to spend their time alone, in one-on-one interaction, and outside rather than inside the firm.
Though the researchers are still putting together their findings, they have observed that the first management style, which is inclusive and cross-functional, is typical of CEOs at companies that are more efficiently run and more profitable.
Why don't all CEOs adopt Style 1? It's likely that part of the story is ability: not everyone is up to the task of dealing with the complexities of a bigger conference room filled with disparate participants. It may also reflect a CEO's decision to devote less attention to the company than to cultivating his outside image. In a 2009 study, Ulrike Malmendier of the University of California, Berkeley, and UCLA's Geoff Tate found that companies performed poorly after their leaders were voted "CEO of the Year," because of the distractions that came with the fame, like writing a book and hobnobbing at Davos. A truly great CEO cannot be distracted; she must remain a great intelligence gatherer, a great communicator and ultimately a great decider, and meetings are one of her most important tools.
The existence of great CEOs does not mean, of course, that the average one deserves his millions—although CEOs, never known for their modesty, may think they do. When Dow Jones reporter Kaveri Niththyananthan questioned the CEO of U.K.-based EasyJet, Andy Harrison, about his 2009 compensation of nearly $4.5 million, Mr. Harrison smiled and replied, "I'm worth it." When a congressman suggested to Ford CEO Alan Mulally that he should take a salary of one dollar, given the near-bankrupt state of the U.S. auto industry, Mr. Mulally replied, "I think I am OK where I am"—this in a year when he took home nearly $17 million in compensation. (Mr. Mulally seems to know the value of meetings; he has listed "You learn from everybody" as one of the key attributes of great CEOs.)
What Messrs. Harrison and Mulally no doubt had in mind were their companies' profit numbers. Profits had fallen by 64% the year Mr. Harrison claimed to be worth his millions, but he could point to five straight years of profits as EasyJet CEO—a rare achievement in the airline business. Mr. Mulally's $17 million payday came on the heels of a billion-dollar turnaround that transformed a $970 million loss at Ford into profits of nearly $700 million just a year later.
But are CEOs really so much smarter (and better at running meetings) than the rest of us? Possibly, but that's not the right question to ask. To claim they're worth it, CEOs don't actually have to be all that much better than the runner-up for the job.
In "superstar economies," as in the market for CEOs, even a slight edge in ability can translate into enormous payoffs. That's why Major League Baseball pitchers earn so much more than triple-A players, despite throwing fastballs only a couple of miles an hour faster. When the stakes are in the billions, shareholders should be more than happy to sign off on a multimillion-dollar paycheck, even if the recipient is just slightly better than the next best option.
By the same token, if CEOs' decisions have such a disproportionate impact on corporate profits, you might be willing to pay a lot to motivate them to put in extra hours in the office. And this view helps to explain—if not always to justify—many of the privileges that come with a corner office: the corporate jet that gives CEOs more face time with employees in different locales; the chauffeured limo that frees up time during the morning commute.
As for another controversial perk, what could possibly be the point of paying CEOs for getting fired? The so-called golden parachute goes back to a perfectly reasonable attempt to get CEOs to create even more value for their companies. Introduced by TWA in 1961, the practice took off during the merger wave of the 1980s, when executives started pondering whether it was smarter to seek out merger opportunities to make money for shareholders or to hold on to their jobs. Mostly they opted for keeping their jobs, often to the detriment of the stock price.
As a result, shareholders gave CEOs an escape valve that, the reasoning went, would encourage them to work in the long-term interests of their companies. Even one of the fiercest critics of CEO compensation, Harvard Law School's Lucian Bebchuk, reports in recent research with Alma Cohen and Charles Wang that golden parachutes do motivate CEOs to find merger-and-acquisition opportunities and, as a result, to extract more takeover premiums for shareholders.
So maybe we should be a bit more understanding of Gillette's board, which awarded a severance package worth well over $160 million to CEO James Kilts after the company was acquired by Procter & Gamble in 2005, in what Gillette shareholder Warren Buffett called a "dream deal." (And Merrill's Mr. Thain? He oversaw the company's acquisition by Bank of America at the height of the financial meltdown, a deal that remains shrouded in controversy, in part as a result of $4 billion in 11th-hour bonuses handed out in December 2008. By the time the dust cleared, Mr. Thain walked away with a seemingly modest $1.5 million severance package.)
Yet executives whose ineptitude or laziness makes their companies ripe for takeover also get rewarded sometimes. Indeed, Prof. Bebchuk's study finds that companies where executives are protected by golden parachutes generally trade at lower levels than those where CEOs don't have them. But how should we think about such pay-for-incompetence? Instead of shaking our heads at the injustice, we can consider it an unfortunate side effect of well-motivated incentives. Designing severance packages more carefully is a worthy idea, but simply eradicating them could do real damage.
Before joining the shareholder activists calling for CEOs to be held accountable and stripped of their more obvious excesses, it's worth pausing to think about why those perks exist in the first place. Sometimes it's the result of slick managers who have co-opted their boards, but sometimes it's simply that we can't easily distinguish good CEOs from bad ones before the employment contract is signed. Seeing CEOs make millions for being fired—and even for losing money—may be hard to stomach, but it is collateral damage in the economics of motivating them to run their companies well.
—Messrs. Fisman and Sullivan are the authors of "The Org: The Underlying Logic of the Office," published this month by Twelve.
Corrections & Amplifications
The remodeling of John Thain's office at Merrill Lynch in 2007 included a $35,000 commode (a piece of furniture). An earlier version of this article said the project included a $35,000 toilet.
The Tyranny of the Queen Bee. By Peggy Drexler
The Tyranny of the Queen Bee. By Peggy Drexler
The Wall Street Journal, March 2, 2013, on page C1
Women who reached positions of power were supposed to be mentors to those who followed—but something is amiss in the professional sisterhood.
http://online.wsj.com/article/SB10001424127887323884304578328271526080496.html
Kelly was a bright woman in her early 30s: whip-smart, well qualified, ambitious—and confused. Even a little frightened.
She worked for a female partner in a big consulting firm. Her boss was so solicitous that Kelly hoped the woman—one of just a few top female partners—might become her mentor. But she began to feel that something was wrong. In meetings, her boss would dismiss her ideas without discussion and even cut her off in mid-sentence. Kelly started to hear about meetings to which she wasn't invited but felt she should be. She was excluded from her boss's small circle of confidants.
What confused Kelly was that she was otherwise doing well at the firm. She felt respected and supported by the other senior partners. She had just one problem, but it was a big one. One of the male partners pulled her aside and confirmed Kelly's suspicions: Her boss had been suggesting to others that Kelly might be happier in a different job, one "more in line with her skills."
I met Kelly while I was conducting research on women in the workplace. She was trying to puzzle through what she had done wrong and what to do about it. (To protect the privacy of Kelly and others in the study, I refer to them here by first names only.) I wasn't sure Kelly had done anything wrong, and I said so. As I told her, "You might have met a queen bee."
Having spent decades working in psychology, a field heavily populated by highly competitive women, I had certainly seen the queen bee before: The female boss who not only has zero interest in fostering the careers of women who aim to follow in her footsteps, but who might even actively attempt to cut them off at the pass.
The term "queen bee syndrome" was coined in the 1970s, following a study led by researchers at the University of Michigan—Graham Staines, Toby Epstein Jayaratne and Carol Tavris—who examined promotion rates and the impact of the women's movement on the workplace. In a 1974 article in Psychology Today, they presented their findings, based on more than 20,000 responses to reader surveys in that magazine and Redbook. They found that women who achieved success in male-dominated environments were at times likely to oppose the rise of other women. This occurred, they argued, largely because the patriarchal culture of work encouraged the few women who rose to the top to become obsessed with maintaining their authority.
Four decades later, the syndrome still thrives, given new life by the mass ascent of women to management positions. This generation of queen bees is no less determined to secure their hard-won places as alpha females. Far from nurturing the growth of younger female talent, they push aside possible competitors by chipping away at their self-confidence or undermining their professional standing. It is a trend thick with irony: The very women who have complained for decades about unequal treatment now perpetuate many of the same problems by turning on their own.
A 2007 survey of 1,000 American workers released by the San Francisco-based Employment Law Alliance found that 45% of respondents had been bullied at the office—verbal abuse, job sabotage, misuse of authority, deliberate destruction of relationships—and that 40% of the reported bullies were women. In 2010, the Workplace Bullying Institute, a national education and advocacy group, reported that female bullies directed their hostilities toward other women 80% of the time—up 9% since 2007. Male bullies, by contrast, were generally equal-opportunity tormentors.
A 2011 survey of 1,000 working women by the American Management Association found that 95% of them believed they were undermined by another woman at some point in their careers. According to a 2008 University of Toronto study of nearly 1,800 U.S. employees, women working under female supervisors reported more symptoms of physical and psychological stress than did those working under male supervisors.
Something is clearly amiss in the professional sisterhood.
Erin, another participant in my own study, was a food writer at a glossy magazine. Her supervisor, Jane, seemed out to get her from day one—though never quite to her face. Jane liked playing hot and cold: One day she would pull Erin close to gossip about another colleague; the next she would scream at her for not following through on a task Erin hadn't known she was expected to perform.
Erin eventually found out that Jane was bad-mouthing her to mutual contacts in the food and restaurant industry. Jane would casually slip barbs into business conversations, telling others, for example, that Erin had engaged in an affair with a married man (she hadn't) or was giving more favorable reviews to restaurant owners who were her friends (she wasn't).
Jane's campaign against Erin wasn't much more than mean-spirited gossiping, but Erin felt that it caused her peers to think of her differently and certainly made her professional life more difficult. But how could she lodge an official complaint? "What would it say?" Erin asked me. "Jane is talking about me behind my back?" At various points, Erin thought the only way to fight back was to play along and start trash-talking Jane. But was that really the solution?
As the old male-dominated workplace has been transformed, many have hoped that the rise of female leaders would create a softer, gentler kind of office, based on communication, team building and personal development. But instead, some women are finding their professional lives dominated by high school "mean girls" all grown up: women with something to prove and a precarious sense of security.
What makes these queen bees so effective and aggravating is that they are able to exploit female vulnerabilities that men may not see, using tactics that their male counterparts might never even notice. Like Jane's gossiping about Erin's personal life. Or when Kelly's boss would comment on her outfit: "Who are you trying to impress today?" Or not-so-gently condescend: "Did you take your smart pill today, sweetie?" Their assaults harm careers and leave no fingerprints.
That is one reason many victims never see such attacks coming—and are powerless to prevent them. In Kelly's case, she had assumed her female boss might want to help foster her growth out of some sense of female solidarity. Erin had specifically sought out working at the magazine because she admired Jane's writing and wanted to learn from her. Why wouldn't Jane be eager to teach? It is women, after all, who are hastening the table-pounding male bullies toward obsolescence.
But both Kelly and Erin's superiors seem to have viewed the women under them not as comrades in arms but as threats to be countered. In a world where there are still relatively few women in positions of power—just 2% of Fortune 500 CEOs and 16% of boards of directors, as noted in Deborah Rhode and Barbara Kellerman's book "Women and Leadership"—it is an understandable assumption that the rise of one would mean the ouster of another. One for one, instead of one plus one.
Though it is getting easier to be a professional woman, it is by no means easy. Some women—especially in industries that remain male-dominated—assume that their perches may be pulled from beneath them at any given moment (and many times, they are indeed encouraged to feel this way). Made to second-guess themselves, they try to ensure their own dominance by keeping others, especially women, down.
The result is a distinctive strain of negative leadership traits—less overtly confrontational than their domineering male counterparts but bullying just the same. Comments on appearance or dress are part of their repertoire—something that would be seen more obviously as harassment when coming from a man—as are higher, sometimes even unreasonable, expectations for performance. Women who have risen in male-dominated fields may want to tell themselves that their struggle and success were unique. As a result they sometimes treat the performance of females who follow as never quite good enough.
It cuts both ways, though: Women aren't always the best employees to other women either. Female subordinates can show less respect and deference to female bosses than to their male bosses.
A 2007 Syracuse University study published in the Journal of Operational and Organizational Psychology found that women are critical of female bosses who are not empathetic. They also tend to resent female bosses who adopt a brusque and assertive management style, even as they find it perfectly acceptable for male bosses. And so they question and push back, answering authority with attitude.
One woman I encountered in my research, Amanda, faced this problem when she began a new job as a vice president at a Manhattan ad agency. The role was her first in management and included overseeing three women who were her age or younger. She knew she was qualified for the position, but from the very first day, Amanda had a difficult time feeling that she had their respect, or even their attention. Though deferential and solicitous to her male colleagues, they openly questioned Amanda's decisions. They went above her head, made comments about her wardrobe and even refused to say good morning and good night. She felt like she was back in high school, trying to break into an elite clique.
Amanda tried various tactics: being overly authoritative, being their "friend." Eventually she stopped trying to get them to respond or encouraging them to do their jobs as directed. Instead, she fired all three.
Queen bees are creatures of circumstance, encircling potential rivals in much the same way as the immune system attacks a foreign body. Female bosses are expected to be "softer" and "gentler" simply because they are women, even though such qualities are not likely the ones that got them to where they are. In the more cutthroat precincts of American achievement, women don't reach the top by bringing in doughnuts in the morning.
Men use fear as a tool of advancement. Why shouldn't women do the same? Until top leadership positions are as routinely available to women as they are to men, freezing out the competition will remain a viable survival strategy.
—Dr. Drexler is an assistant professor of psychology in psychiatry at Weill Cornell Medical College and the author, most recently, of "Our Fathers, Ourselves: Daughters, Fathers and the Changing American Family."
The Wall Street Journal, March 2, 2013, on page C1
Women who reached positions of power were supposed to be mentors to those who followed—but something is amiss in the professional sisterhood.
http://online.wsj.com/article/SB10001424127887323884304578328271526080496.html
Kelly was a bright woman in her early 30s: whip-smart, well qualified, ambitious—and confused. Even a little frightened.
She worked for a female partner in a big consulting firm. Her boss was so solicitous that Kelly hoped the woman—one of just a few top female partners—might become her mentor. But she began to feel that something was wrong. In meetings, her boss would dismiss her ideas without discussion and even cut her off in mid-sentence. Kelly started to hear about meetings to which she wasn't invited but felt she should be. She was excluded from her boss's small circle of confidants.
What confused Kelly was that she was otherwise doing well at the firm. She felt respected and supported by the other senior partners. She had just one problem, but it was a big one. One of the male partners pulled her aside and confirmed Kelly's suspicions: Her boss had been suggesting to others that Kelly might be happier in a different job, one "more in line with her skills."
I met Kelly while I was conducting research on women in the workplace. She was trying to puzzle through what she had done wrong and what to do about it. (To protect the privacy of Kelly and others in the study, I refer to them here by first names only.) I wasn't sure Kelly had done anything wrong, and I said so. As I told her, "You might have met a queen bee."
Having spent decades working in psychology, a field heavily populated by highly competitive women, I had certainly seen the queen bee before: The female boss who not only has zero interest in fostering the careers of women who aim to follow in her footsteps, but who might even actively attempt to cut them off at the pass.
The term "queen bee syndrome" was coined in the 1970s, following a study led by researchers at the University of Michigan—Graham Staines, Toby Epstein Jayaratne and Carol Tavris—who examined promotion rates and the impact of the women's movement on the workplace. In a 1974 article in Psychology Today, they presented their findings, based on more than 20,000 responses to reader surveys in that magazine and Redbook. They found that women who achieved success in male-dominated environments were at times likely to oppose the rise of other women. This occurred, they argued, largely because the patriarchal culture of work encouraged the few women who rose to the top to become obsessed with maintaining their authority.
Four decades later, the syndrome still thrives, given new life by the mass ascent of women to management positions. This generation of queen bees is no less determined to secure their hard-won places as alpha females. Far from nurturing the growth of younger female talent, they push aside possible competitors by chipping away at their self-confidence or undermining their professional standing. It is a trend thick with irony: The very women who have complained for decades about unequal treatment now perpetuate many of the same problems by turning on their own.
A 2007 survey of 1,000 American workers released by the San Francisco-based Employment Law Alliance found that 45% of respondents had been bullied at the office—verbal abuse, job sabotage, misuse of authority, deliberate destruction of relationships—and that 40% of the reported bullies were women. In 2010, the Workplace Bullying Institute, a national education and advocacy group, reported that female bullies directed their hostilities toward other women 80% of the time—up 9% since 2007. Male bullies, by contrast, were generally equal-opportunity tormentors.
A 2011 survey of 1,000 working women by the American Management Association found that 95% of them believed they were undermined by another woman at some point in their careers. According to a 2008 University of Toronto study of nearly 1,800 U.S. employees, women working under female supervisors reported more symptoms of physical and psychological stress than did those working under male supervisors.
Something is clearly amiss in the professional sisterhood.
Erin, another participant in my own study, was a food writer at a glossy magazine. Her supervisor, Jane, seemed out to get her from day one—though never quite to her face. Jane liked playing hot and cold: One day she would pull Erin close to gossip about another colleague; the next she would scream at her for not following through on a task Erin hadn't known she was expected to perform.
Erin eventually found out that Jane was bad-mouthing her to mutual contacts in the food and restaurant industry. Jane would casually slip barbs into business conversations, telling others, for example, that Erin had engaged in an affair with a married man (she hadn't) or was giving more favorable reviews to restaurant owners who were her friends (she wasn't).
Jane's campaign against Erin wasn't much more than mean-spirited gossiping, but Erin felt that it caused her peers to think of her differently and certainly made her professional life more difficult. But how could she lodge an official complaint? "What would it say?" Erin asked me. "Jane is talking about me behind my back?" At various points, Erin thought the only way to fight back was to play along and start trash-talking Jane. But was that really the solution?
As the old male-dominated workplace has been transformed, many have hoped that the rise of female leaders would create a softer, gentler kind of office, based on communication, team building and personal development. But instead, some women are finding their professional lives dominated by high school "mean girls" all grown up: women with something to prove and a precarious sense of security.
What makes these queen bees so effective and aggravating is that they are able to exploit female vulnerabilities that men may not see, using tactics that their male counterparts might never even notice. Like Jane's gossiping about Erin's personal life. Or when Kelly's boss would comment on her outfit: "Who are you trying to impress today?" Or not-so-gently condescend: "Did you take your smart pill today, sweetie?" Their assaults harm careers and leave no fingerprints.
That is one reason many victims never see such attacks coming—and are powerless to prevent them. In Kelly's case, she had assumed her female boss might want to help foster her growth out of some sense of female solidarity. Erin had specifically sought out working at the magazine because she admired Jane's writing and wanted to learn from her. Why wouldn't Jane be eager to teach? It is women, after all, who are hastening the table-pounding male bullies toward obsolescence.
But both Kelly and Erin's superiors seem to have viewed the women under them not as comrades in arms but as threats to be countered. In a world where there are still relatively few women in positions of power—just 2% of Fortune 500 CEOs and 16% of boards of directors, as noted in Deborah Rhode and Barbara Kellerman's book "Women and Leadership"—it is an understandable assumption that the rise of one would mean the ouster of another. One for one, instead of one plus one.
Though it is getting easier to be a professional woman, it is by no means easy. Some women—especially in industries that remain male-dominated—assume that their perches may be pulled from beneath them at any given moment (and many times, they are indeed encouraged to feel this way). Made to second-guess themselves, they try to ensure their own dominance by keeping others, especially women, down.
The result is a distinctive strain of negative leadership traits—less overtly confrontational than their domineering male counterparts but bullying just the same. Comments on appearance or dress are part of their repertoire—something that would be seen more obviously as harassment when coming from a man—as are higher, sometimes even unreasonable, expectations for performance. Women who have risen in male-dominated fields may want to tell themselves that their struggle and success were unique. As a result they sometimes treat the performance of females who follow as never quite good enough.
It cuts both ways, though: Women aren't always the best employees to other women either. Female subordinates can show less respect and deference to female bosses than to their male bosses.
A 2007 Syracuse University study published in the Journal of Operational and Organizational Psychology found that women are critical of female bosses who are not empathetic. They also tend to resent female bosses who adopt a brusque and assertive management style, even as they find it perfectly acceptable for male bosses. And so they question and push back, answering authority with attitude.
One woman I encountered in my research, Amanda, faced this problem when she began a new job as a vice president at a Manhattan ad agency. The role was her first in management and included overseeing three women who were her age or younger. She knew she was qualified for the position, but from the very first day, Amanda had a difficult time feeling that she had their respect, or even their attention. Though deferential and solicitous to her male colleagues, they openly questioned Amanda's decisions. They went above her head, made comments about her wardrobe and even refused to say good morning and good night. She felt like she was back in high school, trying to break into an elite clique.
Amanda tried various tactics: being overly authoritative, being their "friend." Eventually she stopped trying to get them to respond or encouraging them to do their jobs as directed. Instead, she fired all three.
Queen bees are creatures of circumstance, encircling potential rivals in much the same way as the immune system attacks a foreign body. Female bosses are expected to be "softer" and "gentler" simply because they are women, even though such qualities are not likely the ones that got them to where they are. In the more cutthroat precincts of American achievement, women don't reach the top by bringing in doughnuts in the morning.
Men use fear as a tool of advancement. Why shouldn't women do the same? Until top leadership positions are as routinely available to women as they are to men, freezing out the competition will remain a viable survival strategy.
—Dr. Drexler is an assistant professor of psychology in psychiatry at Weill Cornell Medical College and the author, most recently, of "Our Fathers, Ourselves: Daughters, Fathers and the Changing American Family."
Friday, March 1, 2013
Robust Biopharmaceutical Pipeline Offers New Hope for Patients
Robust Biopharmaceutical Pipeline Offers New Hope for Patients
| innovation.org |
Monday, February 25, 2013
Taxation, Bank Leverage, and Financial Crises. By Ruud de Mooij, Michael Keen, and Masanori Orihara
Taxation, Bank Leverage, and Financial Crises. By Ruud de Mooij, Michael Keen, and Masanori Orihara
IMF Working Paper No. 13/48
Feb 25, 2013
http://www.imf.org/external/pubs/cat/longres.aspx?sk=40341.0
Summary: That most corporate tax systems favor debt over equity finance is now widely recognized as, potentially, amplifying risks to financial stability. This paper makes a first attempt to explore, empirically, the link between this tax bias and the probability of financial crisis. It finds that greater tax bias is associated with significantly higher aggregate bank leverage, and that this in turn is associated with a significantly greater chance of crisis. The implication is that tax bias makes crises much more likely, and, conversely, that the welfare gains from policies to alleviate it can be substantial—far greater than previous studies, which have ignored financial stability considerations, suggest.
Introduction excerpts:
The onset of the financial crisis of 2008 quickly prompted many assessments of the role that taxation might have played.1 Their consensus was clear, but vague: tax distortions did not trigger the crisis, but may have increased vulnerability to financial crises. Prominent among the reasons given for this was ‘debt bias’: the tendency toward excess leverage induced, in almost all countries, by the deductibility against corporate taxation of interest payments but not of the return to equity.2 By encouraging firms to finance themselves by debt rather than equity, this might have made them more vulnerable to shocks and so increased both the likelihood and intensity of financial crises. The point applies in principle to all firms, but is a particular concern in relation to financial institutions; and these are the focus here.
This potential link from tax design to financial crises is now widely recognized. But analysis has not progressed beyond metaphor and speculation. Shackelford, Shaviro, and Slemrod (2010, p. 784), for instance, stress “the possibility that the tax biases served…as extra gasoline intensifying the explosion once other causes lit the match”, and the European Commission that “The welfare costs related to debt bias might not be negligible [because] excessive debt levels increase the probability of default” (European Commission, 2011; p. 7), with both the ‘might’ and the ‘not negligible’ leaving much doubt and imprecision. This paper aims to provide a first attempt to establish and quantify an empirical link between the tax incentives that encourage financial institutions (more precisely, banks, the group for which we have data) to finance themselves by debt rather than equity and the likelihood of financial crises erupting; and then to try to quantify the welfare gains that policies to address this bias might consequently yield.
The approach is to combine two elements in a causal chain. The first is that between the statutory corporate tax rate and banks’ leverage. This has received substantial attention in relation to nonfinancial firms,3 but very little in relation to the financial sector. Keen and De Mooij (2011), however, show that for banks too a higher corporate tax rate, amplifying the tax advantage of debt over equity finance, should in principle lead to higher levels of leverage; the presence of capital regulations does not affect the usual tax bias applying, so long as it is privately optimal for banks to hold some buffer over regulatory requirements (as they generally do). Empirically too, Keen and de Mooij (2012) find that, for a large crosscountry panel of banks, tax effects on leverage are significant—and, on average, about aslarge as for nonfinancial institutions. These effects are very much smaller, they also find, for the largest banks, which generally account for the vast bulk of all bank assets. One task in this paper is to explore these findings further, using data now available to extend coverage into the crisis period that began in 2008—enabling a comparison of tax impacts pre- and post-onset—and applying the same estimation strategy to country-level data for the OECD.
Importantly, the finding that tax distortions to leverage are small for the larger banks, which are massively larger than the rest, does not mean that the welfare impact of tax distortions is in aggregate negligible: even small changes in the leverage of very large banks could have a large impact on the likelihood of their distress or failure, and hence on the likelihood of financial crisis.
This is where the second link in the causal chain explored here comes in: that between the aggregate leverage of the financial sector and the probability of financial crisis.4 We estimate such a relationship for OECD countries, applying the estimation strategy of Barrell et al. (2010) and Kato, Kobayashi, and Saita (2010) but, in contrast to these earlier studies, capturing data on the recent financial crisis from Laeven and Valencia (2010). The results suggest sizeable and highly nonlinear effects of aggregate bank leverage on the probability of financial crisis.
Combining the results from these two estimating equations enables simple calculations of the impact of a variety of tax reforms on the likelihood of financial crisis. Linking this, in turn, with estimates of the output loss that is historically associated with such crises gives some rough sense of the potential welfare gains from policies that mitigate debt bias in the financial sector. Putting aside the overarching debate as to the proper roles of taxation and regulation in addressing the potential for excess leverage in the financial sector,5 we consider three tax reforms that would reduce the tax incentive to debt finance: a cut in the corporate tax rate; adoption of an Allowance for Corporate Equity form of corporate tax (which would in principle eliminate debt bias); and a ‘bank levy’ of broadly the kind that a dozen or so countries have introduced since the crisis.6
All this gives a very different perspective on the nature and possible magnitude of the welfare costs associated with debt bias. Previous work, which has not reflected considerations of financial stability, has concluded that these are small: Gordon (2010) estimates the total efficiency loss from debt bias in the U.S. to be less than 1 percent of corporate income tax (CIT) revenue and concludes that: “tax distortions from corporate financial policy are not an important consideration when setting tax policy”; Weichenrieder and Klautke (2008) put the marginal welfare loss from debt bias somewhat higher, but still only at 0.06–0.16 percent of the capital stock. The question here is whether considerations of financial stability imply much higher welfare losses—and the conclusion will be that it seems they do.
Conclusion
The analysis here is in several respects simplistic and limited. In particular, we have not uncovered a direct link between tax incentives favoring debt finance and the probability of financial crisis. But the evidence presented here does suggest the real possibility of such a connection. If debt bias leads to higher aggregate bank leverage than would otherwise be the case—and it seems that it does—and if higher aggregate bank leverage makes financial crisis more likely—and it seems that it does—then debt bias increases the chances of financial crisis. This, in turn, can imply welfare gains from mitigating debt bias far higher than the small amounts found in previous work: noticeably more, in some of the calculations reported here, than 1 percent of GDP. Regulation, of course, has historically had the dominant role in addressing such problems of excess leverage in the financial sector, and the higher and tighter capital requirements of Basel III should to some degree reduce the welfare costs of debt bias. How much comfort is taken from this will depend on one’s evaluation of these reforms. What the evidence assembled here suggests, however, is that the tax incentive encouraging banks to use debt finance is not just an inelegant inconsistency with regulations intended to do the exact opposite, but a potential risk to be recognized, and, as need be, addressed, in the pursuit of financial stability.
IMF Working Paper No. 13/48
Feb 25, 2013
http://www.imf.org/external/pubs/cat/longres.aspx?sk=40341.0
Summary: That most corporate tax systems favor debt over equity finance is now widely recognized as, potentially, amplifying risks to financial stability. This paper makes a first attempt to explore, empirically, the link between this tax bias and the probability of financial crisis. It finds that greater tax bias is associated with significantly higher aggregate bank leverage, and that this in turn is associated with a significantly greater chance of crisis. The implication is that tax bias makes crises much more likely, and, conversely, that the welfare gains from policies to alleviate it can be substantial—far greater than previous studies, which have ignored financial stability considerations, suggest.
Introduction excerpts:
The onset of the financial crisis of 2008 quickly prompted many assessments of the role that taxation might have played.1 Their consensus was clear, but vague: tax distortions did not trigger the crisis, but may have increased vulnerability to financial crises. Prominent among the reasons given for this was ‘debt bias’: the tendency toward excess leverage induced, in almost all countries, by the deductibility against corporate taxation of interest payments but not of the return to equity.2 By encouraging firms to finance themselves by debt rather than equity, this might have made them more vulnerable to shocks and so increased both the likelihood and intensity of financial crises. The point applies in principle to all firms, but is a particular concern in relation to financial institutions; and these are the focus here.
This potential link from tax design to financial crises is now widely recognized. But analysis has not progressed beyond metaphor and speculation. Shackelford, Shaviro, and Slemrod (2010, p. 784), for instance, stress “the possibility that the tax biases served…as extra gasoline intensifying the explosion once other causes lit the match”, and the European Commission that “The welfare costs related to debt bias might not be negligible [because] excessive debt levels increase the probability of default” (European Commission, 2011; p. 7), with both the ‘might’ and the ‘not negligible’ leaving much doubt and imprecision. This paper aims to provide a first attempt to establish and quantify an empirical link between the tax incentives that encourage financial institutions (more precisely, banks, the group for which we have data) to finance themselves by debt rather than equity and the likelihood of financial crises erupting; and then to try to quantify the welfare gains that policies to address this bias might consequently yield.
The approach is to combine two elements in a causal chain. The first is that between the statutory corporate tax rate and banks’ leverage. This has received substantial attention in relation to nonfinancial firms,3 but very little in relation to the financial sector. Keen and De Mooij (2011), however, show that for banks too a higher corporate tax rate, amplifying the tax advantage of debt over equity finance, should in principle lead to higher levels of leverage; the presence of capital regulations does not affect the usual tax bias applying, so long as it is privately optimal for banks to hold some buffer over regulatory requirements (as they generally do). Empirically too, Keen and de Mooij (2012) find that, for a large crosscountry panel of banks, tax effects on leverage are significant—and, on average, about aslarge as for nonfinancial institutions. These effects are very much smaller, they also find, for the largest banks, which generally account for the vast bulk of all bank assets. One task in this paper is to explore these findings further, using data now available to extend coverage into the crisis period that began in 2008—enabling a comparison of tax impacts pre- and post-onset—and applying the same estimation strategy to country-level data for the OECD.
Importantly, the finding that tax distortions to leverage are small for the larger banks, which are massively larger than the rest, does not mean that the welfare impact of tax distortions is in aggregate negligible: even small changes in the leverage of very large banks could have a large impact on the likelihood of their distress or failure, and hence on the likelihood of financial crisis.
This is where the second link in the causal chain explored here comes in: that between the aggregate leverage of the financial sector and the probability of financial crisis.4 We estimate such a relationship for OECD countries, applying the estimation strategy of Barrell et al. (2010) and Kato, Kobayashi, and Saita (2010) but, in contrast to these earlier studies, capturing data on the recent financial crisis from Laeven and Valencia (2010). The results suggest sizeable and highly nonlinear effects of aggregate bank leverage on the probability of financial crisis.
Combining the results from these two estimating equations enables simple calculations of the impact of a variety of tax reforms on the likelihood of financial crisis. Linking this, in turn, with estimates of the output loss that is historically associated with such crises gives some rough sense of the potential welfare gains from policies that mitigate debt bias in the financial sector. Putting aside the overarching debate as to the proper roles of taxation and regulation in addressing the potential for excess leverage in the financial sector,5 we consider three tax reforms that would reduce the tax incentive to debt finance: a cut in the corporate tax rate; adoption of an Allowance for Corporate Equity form of corporate tax (which would in principle eliminate debt bias); and a ‘bank levy’ of broadly the kind that a dozen or so countries have introduced since the crisis.6
All this gives a very different perspective on the nature and possible magnitude of the welfare costs associated with debt bias. Previous work, which has not reflected considerations of financial stability, has concluded that these are small: Gordon (2010) estimates the total efficiency loss from debt bias in the U.S. to be less than 1 percent of corporate income tax (CIT) revenue and concludes that: “tax distortions from corporate financial policy are not an important consideration when setting tax policy”; Weichenrieder and Klautke (2008) put the marginal welfare loss from debt bias somewhat higher, but still only at 0.06–0.16 percent of the capital stock. The question here is whether considerations of financial stability imply much higher welfare losses—and the conclusion will be that it seems they do.
Conclusion
The analysis here is in several respects simplistic and limited. In particular, we have not uncovered a direct link between tax incentives favoring debt finance and the probability of financial crisis. But the evidence presented here does suggest the real possibility of such a connection. If debt bias leads to higher aggregate bank leverage than would otherwise be the case—and it seems that it does—and if higher aggregate bank leverage makes financial crisis more likely—and it seems that it does—then debt bias increases the chances of financial crisis. This, in turn, can imply welfare gains from mitigating debt bias far higher than the small amounts found in previous work: noticeably more, in some of the calculations reported here, than 1 percent of GDP. Regulation, of course, has historically had the dominant role in addressing such problems of excess leverage in the financial sector, and the higher and tighter capital requirements of Basel III should to some degree reduce the welfare costs of debt bias. How much comfort is taken from this will depend on one’s evaluation of these reforms. What the evidence assembled here suggests, however, is that the tax incentive encouraging banks to use debt finance is not just an inelegant inconsistency with regulations intended to do the exact opposite, but a potential risk to be recognized, and, as need be, addressed, in the pursuit of financial stability.
Friday, February 22, 2013
Asset Price Bubbles: A Selective Survey. By Anna Scherbina
Asset Price Bubbles: A Selective Survey. By Anna Scherbina
IMF Working Paper No. 13/45
Feb 21, 2013
http://www.imf.org/external/pubs/cat/longres.aspx?sk=40327.0
Summary: Why do asset price bubbles continue to appear in various markets? This paper provides an overview of recent literature on bubbles, with significant attention given to behavioral models and rational models with frictions. Unlike the standard rational models, the new literature is able to model the common characteristics of historical bubble episodes and offer insights for how bubbles are initiated and sustained, the reasons they burst, and why arbitrage forces do not routinely step in to squash them. The latest U.S. real estate bubble is described in the context of this literature.
Introduction excerpts:
The persistent failure of present-value models to explain asset price levels led academic research to introduce the concept of bubbles as a tool to model price deviations from presentvalue relations. The early literature was dominated by models in which all agents were assumed to be rational and yet a bubble could exist. In many of the more recent papers, the perfect rationality assumption was relaxed, allowing the models to shift the focus to explaining how a bubble may be initiated, under which conditions it would burst, and why arbitrage forces may fail to ensure that prices reflect fundamentals at all times. In light of the recent U.S. real estate bubble, the question of why bubbles are so prevalent is once again a matter of concern of academics and policy makers. This paper surveys the recent literature on asset price bubbles, with significant attention given to behavioral models as well as rational models with incentive problems, market frictions, and non-traditional preferences. For surveys of the earlier literature, see, e.g., Camerer (1989) and Stiglitz (1990).
There are a number of ways to define a bubble. A very straightforward definition is that a bubble is a deviation of the market price from the asset’s fundamental value. Value investors specialize in finding and investing in undervalued assets. In contrast, short sellers, who search the market for overvalued assets in order to sell them short, are routinely vilified by governments, the popular press, and, not surprisingly, by the overvalued firms themselves.1 Trading against an overvaluation involves the additional costs and risks of maintaining a short position, such as the potentially unlimited loss, the risk that the borrowed asset will be called back prematurely, and a commonly charged fee that manifests itself as a low interest rate paid on the margin account; for this reason, a persistent overvaluation is more common than a persistent undervaluation.
A positive or negative mispricing may arise when initial news about a firm’s fundamentals moves the stock price up or down and feedback traders buy or sell additional shares in response to past price movement without regard for current valuation, thus continuing the price trend beyond the value justified by fundamentals.2 However, because of the potentially nontrivial costs of short selling an overvaluation will be less readily eliminated, making positive bubbles more common. The paper will, therefore, focus predominately on positive price bubbles. We can define a positive bubble occurring when an asset’s trading price exceeds the discounted value of expected future cash flows (CF):
[traditional formula],
where r is the appropriate discount rate.3 Since it may be difficult to estimate the required compensation for risk, an alternative definition may be used that replaces the discount rate with the risk-free rate, r sub f:
[same formula with r sub f instead of r].
When the asset’s cash flows are positively correlated with market risk, as is the case for most firms, the required rate of return is strictly greater than the risk-free rate and the discountedcash- flow formula represents an upper limit of the justifiable range of fair values. Likewise, when it is difficult to forecast future cash flows for a particular asset or firm, an upper bound of forecasted cash flows for other firms in the same industry or asset class may be used.
Over the years, the academic study of bubbles has expanded to explore the effects of perverse incentives and of bounded rationality. The new generation of rational models identifies the incentive to herd and the limited liability compensation structure as pervasive problems that encourage professional money managers to invest in bubbles. Another problem contributing to bubbles is that information intermediaries are not paid directly by investors, and their incentives are not always compatible with reporting negative information. And rather than merely trying to answer under what conditions bubbles may exist in asset prices, behavioral models offer new insights for how a bubble may be initiated, under which conditions it would burst, and why arbitrage forces may fail to ensure that prices reflect fundamentals at all times. Moreover, some models offer the explanation for why many bubble episodes are accompanied by high trading volume. The behavioral view of bubbles finds support in experimental studies.
IMF Working Paper No. 13/45
Feb 21, 2013
http://www.imf.org/external/pubs/cat/longres.aspx?sk=40327.0
Summary: Why do asset price bubbles continue to appear in various markets? This paper provides an overview of recent literature on bubbles, with significant attention given to behavioral models and rational models with frictions. Unlike the standard rational models, the new literature is able to model the common characteristics of historical bubble episodes and offer insights for how bubbles are initiated and sustained, the reasons they burst, and why arbitrage forces do not routinely step in to squash them. The latest U.S. real estate bubble is described in the context of this literature.
Introduction excerpts:
The persistent failure of present-value models to explain asset price levels led academic research to introduce the concept of bubbles as a tool to model price deviations from presentvalue relations. The early literature was dominated by models in which all agents were assumed to be rational and yet a bubble could exist. In many of the more recent papers, the perfect rationality assumption was relaxed, allowing the models to shift the focus to explaining how a bubble may be initiated, under which conditions it would burst, and why arbitrage forces may fail to ensure that prices reflect fundamentals at all times. In light of the recent U.S. real estate bubble, the question of why bubbles are so prevalent is once again a matter of concern of academics and policy makers. This paper surveys the recent literature on asset price bubbles, with significant attention given to behavioral models as well as rational models with incentive problems, market frictions, and non-traditional preferences. For surveys of the earlier literature, see, e.g., Camerer (1989) and Stiglitz (1990).
There are a number of ways to define a bubble. A very straightforward definition is that a bubble is a deviation of the market price from the asset’s fundamental value. Value investors specialize in finding and investing in undervalued assets. In contrast, short sellers, who search the market for overvalued assets in order to sell them short, are routinely vilified by governments, the popular press, and, not surprisingly, by the overvalued firms themselves.1 Trading against an overvaluation involves the additional costs and risks of maintaining a short position, such as the potentially unlimited loss, the risk that the borrowed asset will be called back prematurely, and a commonly charged fee that manifests itself as a low interest rate paid on the margin account; for this reason, a persistent overvaluation is more common than a persistent undervaluation.
A positive or negative mispricing may arise when initial news about a firm’s fundamentals moves the stock price up or down and feedback traders buy or sell additional shares in response to past price movement without regard for current valuation, thus continuing the price trend beyond the value justified by fundamentals.2 However, because of the potentially nontrivial costs of short selling an overvaluation will be less readily eliminated, making positive bubbles more common. The paper will, therefore, focus predominately on positive price bubbles. We can define a positive bubble occurring when an asset’s trading price exceeds the discounted value of expected future cash flows (CF):
[traditional formula],
where r is the appropriate discount rate.3 Since it may be difficult to estimate the required compensation for risk, an alternative definition may be used that replaces the discount rate with the risk-free rate, r sub f:
[same formula with r sub f instead of r].
When the asset’s cash flows are positively correlated with market risk, as is the case for most firms, the required rate of return is strictly greater than the risk-free rate and the discountedcash- flow formula represents an upper limit of the justifiable range of fair values. Likewise, when it is difficult to forecast future cash flows for a particular asset or firm, an upper bound of forecasted cash flows for other firms in the same industry or asset class may be used.
Over the years, the academic study of bubbles has expanded to explore the effects of perverse incentives and of bounded rationality. The new generation of rational models identifies the incentive to herd and the limited liability compensation structure as pervasive problems that encourage professional money managers to invest in bubbles. Another problem contributing to bubbles is that information intermediaries are not paid directly by investors, and their incentives are not always compatible with reporting negative information. And rather than merely trying to answer under what conditions bubbles may exist in asset prices, behavioral models offer new insights for how a bubble may be initiated, under which conditions it would burst, and why arbitrage forces may fail to ensure that prices reflect fundamentals at all times. Moreover, some models offer the explanation for why many bubble episodes are accompanied by high trading volume. The behavioral view of bubbles finds support in experimental studies.
Thursday, February 21, 2013
Dealing with Private Debt Distress in the Wake of the European Financial Crisis - A Review of the Economics and Legal Toolbox
Dealing with Private Debt Distress in the Wake of the European Financial Crisis - A Review of the Economics and Legal Toolbox. By Yan Liu and Christoph Rosenberg
IMF Working Paper No. 13/44
February 20, 2013
http://www.imf.org/external/pubs/cat/longres.aspx?sk=40326.0
Summary: The private non-financial sector in Europe is facing increased challenges in meeting its debt servicing obligation. In response, governments are revisiting legal tools and—in some cases—institutional arrangements to deal with over-indebtedness. For households, where the problem in some countries is large but no established best practice exists, reforms have generally sought to allow debtors a fresh start while minimizing moral hazard and preserving bank solvency and credit discipline. For the corporate sector, efforts have focused on facilitating debt restruturing (including through out of court mechanisms). Direct government intervention has been rare.
ISBN/ISSN: 9781475544305 / 2227-8885
Stock No: WPIEA2013044
IMF Working Paper No. 13/44
February 20, 2013
http://www.imf.org/external/pubs/cat/longres.aspx?sk=40326.0
Summary: The private non-financial sector in Europe is facing increased challenges in meeting its debt servicing obligation. In response, governments are revisiting legal tools and—in some cases—institutional arrangements to deal with over-indebtedness. For households, where the problem in some countries is large but no established best practice exists, reforms have generally sought to allow debtors a fresh start while minimizing moral hazard and preserving bank solvency and credit discipline. For the corporate sector, efforts have focused on facilitating debt restruturing (including through out of court mechanisms). Direct government intervention has been rare.
ISBN/ISSN: 9781475544305 / 2227-8885
Stock No: WPIEA2013044
Stapleton Roy: U.S. and China Must Halt Drift Toward Strategic Rivalry
Stapleton Roy: U.S. and China Must Halt Drift Toward Strategic Rivalry
HONOLULU (Feb. 20, 2013) -- With China’s leadership in transition and incoming Secretary of State John Kerry heading a new foreign policy team in the second Obama administration, leaders in both countries must face a “frightening array of domestic and foreign policy problems” in managing their vital relationship, longtime senior U.S. diplomat J. Stapleton Roy said in a Feb. 13 address at the East-West Center in Hawai‘i.
(View a video of Roy’s speech.)
“No task is going to be more important than trying to arrest the current drift in U.S.-China relations toward strategic rivalry,” he said. “If leaders in both countries fail to deal with this issue, there is a strong possibility that tensions will rise and undermine the benign climate that has been so important in producing the Asian economic miracle – and to a significant degree, political miracle – over the past 30 years.”
Roy, who served as U.S. ambassador to China from 1991 to 1995, said the two nations are “locked in the traditional problem of an established power facing a rising power, and we know from historical precedent that competitive factors that emerge in such situations often result in bloody wars.” The good news, he said, is that “leaders in both countries are aware of the historical precedents and are determined to not let history repeat itself.”
While top leaders on both sides have recognized the need to work together toward a stable balance between cooperation and competition, Roy said, neither country has been able to implement this, and “it remains to be seen if it is even possible to establish this new type of relationship.”
Roy said opinion polls over the last couple of years have shown a dramatic increase in the percentage of Chinese citizens and officials who view relations with the U.S. as characterized by hostility rather than cooperation. During the same period, he said, U.S. polls indicate that “we don’t think of China in same way.”
“This is something we need to be concerned about,” he said, “because the tensions and passions on the other side are stronger than they are on our side, and this requires careful management.”
While incoming Chinese President Xi Jinping and Premier Li Keqian have already declared their interest in implementing further market reforms and reining in pervasive corruption, Roy said, “the Communist Party may lack the legitimacy and will to force through the far-reaching reforms that are needed against the influence of special interests, especially large state-owned businesses. One can reasonably doubt if a party corrupted by wealth at the highest level can carry out the kind of fundamental systemic reforms that are necessary.”
In addition, he said, China’s new leaders will be faced with a litany of internal difficulties that “illustrate why it would still be foolish to postulate that the 21st century will belong to China.” These include what even outgoing premier Wen Jiabao has characterized as an “unstable, unbalanced, uncoordinated and unsustainable” economy, Roy said, along with a rapidly aging population, slowing economic growth, and what is known as the “middle income trap,” when a rising economy loses the competitive advantage of low-cost labor as it climbs the income scale.
“Wages in China have been rising rapidly, especially for skilled labor,” Roy said. “So they have to substitute something else, such as innovation or efficiency.” Historically, he said, “over 100 countries have reached the middle income trap, and 86 percent failed to get out of it. They grow, then reach a certain level and stall out. China has to find way to avoid this, and that’s a big challenge.”
Another huge issue, Roy said, is that “rising nationalism is pushing China toward a more assertive international style and enmeshing it in difficulties with a lot of its neighbors. This has the potential to undermine the benign international environment that has underpinned the dramatic accomplishments China has made.”
China’s more assertive recent behavior is “both typical and predictable for a rising power,” he said. “But China is finding that when it expresses this nationalism through more assertive behavior, its neighbors all show solidarity with the U.S., which is not what China is trying to accomplish. And this is causing resentment in China, because they find that they can’t use their growing power effectively as a result of the negative consequences.”
This could actually prove to be a positive phenomenon for the U.S., he said, “because if we’re skillful enough to understand this dynamic, we are in a position to constrain China when it’s behaving irresponsibly and cooperate with it when it behaves responsibly.”
“China is not the Soviet Union,” he said. “China’s rise has benefitted all of the countries around it, and as a result they don’t want a containment policy; they want responsible behavior by China so they can expand economic and trade relations, which already dwarf their relations with other countries. But when China behaves badly, then they want the United States to be present because they can’t deal with China on their own. It’s a dynamic that skillful diplomacy should be able to take advantage from.”
With China now “locked in a web of disputes” with its neighbors over small but potentially resource-rich islands in the region, Roy said, “the United States finds itself in the awkward situation of trying to reassure our allies at the same time we try to restrain their behavior, because we don’t want tiny little islands in the western Pacific to end up bringing us into a great-power confrontation with China.”
The threat of such hostility is real, he said, and “these disputes are having direct impact on U.S.-China relations – but it’s an asymmetrical impact, because Americans basically don’t care about these islands. But in China it is an issue of great nationalist importance, as it is for Japan, the Philippines and other claimants.”
Such issues, he said, illustrate the complexity of trying to manage this vitally important relationship: “A stronger China will undoubtedly see itself as again becoming a central regional player, but the United States intends to remain actively engaged in East Asia, where we have formal alliances and strategic ties throughout the region.”
The question for leaders of both countries, Roy said, is whether they can find a solution to this conundrum. As of now, he said, “there is a disconnect between the high-level desire on both sides not to have our relationship drift toward rivalry and confrontation, and the way we’re actually behaving, which is driving us in that direction.”
Open military conflict is unlikely and preventable, he said, but just the threat of it could cause a costly “military capabilities competition” for decades to come, at a time when the U.S. is already facing budget cuts.
“Chinese and U.S. declared strategic goals and their actions are not yet in conformity with each other,” Roy said. “In my mind, this is the central strategic challenge in the U.S.-China relationship, and if we don’t address it forthrightly, it will be more difficult to manage in the future.”
The EAST-WEST CENTER promotes better relations and understanding among the people and nations of the United States, Asia, and the Pacific through cooperative study, research, and dialogue. Established by the U.S. Congress in 1960, the Center serves as a resource for information and analysis on critical issues of common concern, bringing people together to exchange views, build expertise, and develop policy options.
Click here for links to all East-West Center media programs, fellowships and services.
Connect with the East-West Center on Facebook and Twitter.
HONOLULU (Feb. 20, 2013) -- With China’s leadership in transition and incoming Secretary of State John Kerry heading a new foreign policy team in the second Obama administration, leaders in both countries must face a “frightening array of domestic and foreign policy problems” in managing their vital relationship, longtime senior U.S. diplomat J. Stapleton Roy said in a Feb. 13 address at the East-West Center in Hawai‘i.
(View a video of Roy’s speech.)
“No task is going to be more important than trying to arrest the current drift in U.S.-China relations toward strategic rivalry,” he said. “If leaders in both countries fail to deal with this issue, there is a strong possibility that tensions will rise and undermine the benign climate that has been so important in producing the Asian economic miracle – and to a significant degree, political miracle – over the past 30 years.”
Roy, who served as U.S. ambassador to China from 1991 to 1995, said the two nations are “locked in the traditional problem of an established power facing a rising power, and we know from historical precedent that competitive factors that emerge in such situations often result in bloody wars.” The good news, he said, is that “leaders in both countries are aware of the historical precedents and are determined to not let history repeat itself.”
While top leaders on both sides have recognized the need to work together toward a stable balance between cooperation and competition, Roy said, neither country has been able to implement this, and “it remains to be seen if it is even possible to establish this new type of relationship.”
Roy said opinion polls over the last couple of years have shown a dramatic increase in the percentage of Chinese citizens and officials who view relations with the U.S. as characterized by hostility rather than cooperation. During the same period, he said, U.S. polls indicate that “we don’t think of China in same way.”
“This is something we need to be concerned about,” he said, “because the tensions and passions on the other side are stronger than they are on our side, and this requires careful management.”
While incoming Chinese President Xi Jinping and Premier Li Keqian have already declared their interest in implementing further market reforms and reining in pervasive corruption, Roy said, “the Communist Party may lack the legitimacy and will to force through the far-reaching reforms that are needed against the influence of special interests, especially large state-owned businesses. One can reasonably doubt if a party corrupted by wealth at the highest level can carry out the kind of fundamental systemic reforms that are necessary.”
In addition, he said, China’s new leaders will be faced with a litany of internal difficulties that “illustrate why it would still be foolish to postulate that the 21st century will belong to China.” These include what even outgoing premier Wen Jiabao has characterized as an “unstable, unbalanced, uncoordinated and unsustainable” economy, Roy said, along with a rapidly aging population, slowing economic growth, and what is known as the “middle income trap,” when a rising economy loses the competitive advantage of low-cost labor as it climbs the income scale.
“Wages in China have been rising rapidly, especially for skilled labor,” Roy said. “So they have to substitute something else, such as innovation or efficiency.” Historically, he said, “over 100 countries have reached the middle income trap, and 86 percent failed to get out of it. They grow, then reach a certain level and stall out. China has to find way to avoid this, and that’s a big challenge.”
Another huge issue, Roy said, is that “rising nationalism is pushing China toward a more assertive international style and enmeshing it in difficulties with a lot of its neighbors. This has the potential to undermine the benign international environment that has underpinned the dramatic accomplishments China has made.”
China’s more assertive recent behavior is “both typical and predictable for a rising power,” he said. “But China is finding that when it expresses this nationalism through more assertive behavior, its neighbors all show solidarity with the U.S., which is not what China is trying to accomplish. And this is causing resentment in China, because they find that they can’t use their growing power effectively as a result of the negative consequences.”
This could actually prove to be a positive phenomenon for the U.S., he said, “because if we’re skillful enough to understand this dynamic, we are in a position to constrain China when it’s behaving irresponsibly and cooperate with it when it behaves responsibly.”
“China is not the Soviet Union,” he said. “China’s rise has benefitted all of the countries around it, and as a result they don’t want a containment policy; they want responsible behavior by China so they can expand economic and trade relations, which already dwarf their relations with other countries. But when China behaves badly, then they want the United States to be present because they can’t deal with China on their own. It’s a dynamic that skillful diplomacy should be able to take advantage from.”
With China now “locked in a web of disputes” with its neighbors over small but potentially resource-rich islands in the region, Roy said, “the United States finds itself in the awkward situation of trying to reassure our allies at the same time we try to restrain their behavior, because we don’t want tiny little islands in the western Pacific to end up bringing us into a great-power confrontation with China.”
The threat of such hostility is real, he said, and “these disputes are having direct impact on U.S.-China relations – but it’s an asymmetrical impact, because Americans basically don’t care about these islands. But in China it is an issue of great nationalist importance, as it is for Japan, the Philippines and other claimants.”
Such issues, he said, illustrate the complexity of trying to manage this vitally important relationship: “A stronger China will undoubtedly see itself as again becoming a central regional player, but the United States intends to remain actively engaged in East Asia, where we have formal alliances and strategic ties throughout the region.”
The question for leaders of both countries, Roy said, is whether they can find a solution to this conundrum. As of now, he said, “there is a disconnect between the high-level desire on both sides not to have our relationship drift toward rivalry and confrontation, and the way we’re actually behaving, which is driving us in that direction.”
Open military conflict is unlikely and preventable, he said, but just the threat of it could cause a costly “military capabilities competition” for decades to come, at a time when the U.S. is already facing budget cuts.
“Chinese and U.S. declared strategic goals and their actions are not yet in conformity with each other,” Roy said. “In my mind, this is the central strategic challenge in the U.S.-China relationship, and if we don’t address it forthrightly, it will be more difficult to manage in the future.”
##
The EAST-WEST CENTER promotes better relations and understanding among the people and nations of the United States, Asia, and the Pacific through cooperative study, research, and dialogue. Established by the U.S. Congress in 1960, the Center serves as a resource for information and analysis on critical issues of common concern, bringing people together to exchange views, build expertise, and develop policy options.
Click here for links to all East-West Center media programs, fellowships and services.
Connect with the East-West Center on Facebook and Twitter.
Saturday, February 16, 2013
BCBS: Supervisory guidance for managing risks associated with the settlement of foreign exchange transactions
BCBS: Supervisory guidance for managing risks associated with the settlement of foreign exchange transactions
February 15 2013
http://www.bis.org/publ/bcbs241.htm
The purpose of this guidance is to provide updated guidance to supervisors and the banks they supervise on approaches to managing the risks associated with the settlement of FX transactions. This guidance expands on, and replaces, the BCBS's Supervisory guidance for managing settlement risk in foreign exchange transactions published in September 2000.
Since the BCBS's Supervisory guidance for managing settlement risk in foreign exchange transactions (2000) was published, the foreign exchange market has made significant strides in reducing the risks associated with the settlement of FX transactions. Substantial FX settlement-related risks remain, however, not least because of the rapid growth in FX trading activities.
The document provides a more comprehensive and detailed view on governance arrangements and the management of principal risk, replacement cost risk and all other FX settlement-related risks. In addition, it promotes the use of payment-versus-payment arrangements, where practicable, to reduce principal risk.
The guidance is organized into seven "guidelines" that address governance, principal risk, replacement cost risk, liquidity risk, operational risk, legal risk, and capital for FX transactions. The key recommendations emphasize the following:
February 15 2013
http://www.bis.org/publ/bcbs241.htm
The purpose of this guidance is to provide updated guidance to supervisors and the banks they supervise on approaches to managing the risks associated with the settlement of FX transactions. This guidance expands on, and replaces, the BCBS's Supervisory guidance for managing settlement risk in foreign exchange transactions published in September 2000.
Since the BCBS's Supervisory guidance for managing settlement risk in foreign exchange transactions (2000) was published, the foreign exchange market has made significant strides in reducing the risks associated with the settlement of FX transactions. Substantial FX settlement-related risks remain, however, not least because of the rapid growth in FX trading activities.
The document provides a more comprehensive and detailed view on governance arrangements and the management of principal risk, replacement cost risk and all other FX settlement-related risks. In addition, it promotes the use of payment-versus-payment arrangements, where practicable, to reduce principal risk.
The guidance is organized into seven "guidelines" that address governance, principal risk, replacement cost risk, liquidity risk, operational risk, legal risk, and capital for FX transactions. The key recommendations emphasize the following:
- A bank should ensure that all FX settlement-related risks are effectively managed and that its practices are consistent with those used for managing other counterparty exposures of similar size and duration.
- A bank should reduce its principal risk as much as practicable by settling FX transactions through the use of FMIs that provide PVP arrangements. Where PVP settlement is not practicable, a bank should properly identify, measure, control and reduce the size and duration of its remaining principal risk.
- A bank should ensure that when analysing capital needs, all FX settlement-related risks should be considered, including principal risk and replacement cost risk and that sufficient capital is held against these potential exposures, as appropriate.
- A bank should use netting arrangements and collateral arrangements to reduce its replacement cost risk and should fully collateralise its mark-to-market exposure on physically settling FX swaps and forwards with counterparties that are financial institutions and systemically important non-financial entities.
Wednesday, February 13, 2013
A Banking Union for the Euro Area. IMF Staff Discussion Note
A Banking Union for the Euro Area. By Rishi Goyal, Petya Koeva Brooks, Mahmood Pradhan, Thierry Tressel, Giovanni Dell'Ariccia, Ross Leckow, Ceyla Pazarbasioglu, and an IMF Staff Team
IMF Staff Discussion Note 13/01
February 13, 2013
http://www.imf.org/external/pubs/cat/longres.aspx?sk=40317.0
Summary: The SDN elaborates the case for, and the design of, a banking union for the euro area. It discusses the benefits and costs of a banking union, presents a steady state view of the banking union, elaborates difficult transition issues, and briefly discusses broader EU issues. As such, it assesses current plans and provides advice. It is accompanied by three background technical notes that analyze in depth the various elements of the banking union: a single supervisory framework; a single resolution and common safety net; and urgent issues related to repair of weak banks in Europe.
ISBN/ISSN: 9781475521160 / 2221-030X
Stock No: SDNEA2013001
Executive summary:
IMF Staff Discussion Note 13/01
February 13, 2013
http://www.imf.org/external/pubs/cat/longres.aspx?sk=40317.0
Summary: The SDN elaborates the case for, and the design of, a banking union for the euro area. It discusses the benefits and costs of a banking union, presents a steady state view of the banking union, elaborates difficult transition issues, and briefly discusses broader EU issues. As such, it assesses current plans and provides advice. It is accompanied by three background technical notes that analyze in depth the various elements of the banking union: a single supervisory framework; a single resolution and common safety net; and urgent issues related to repair of weak banks in Europe.
ISBN/ISSN: 9781475521160 / 2221-030X
Stock No: SDNEA2013001
Executive summary:
- A banking union—a single supervisory-regulatory framework, resolution mechanism, and safety net—for the euro area is the logical conclusion of the idea that integrated banking systems require integrated prudential oversight.
- The case for a banking union for the euro area is both immediate and longer term. Moving responsibility for potential financial support and bank supervision to a shared level can reduce fragmentation of financial markets, stem deposit flight, and weaken the vicious loop of rising sovereign and bank borrowing costs. In steady state, a single framework should bring a uniformly high standard of confidence and oversight, reduce national distortions, and mitigate the buildup of concentrated risk that compromises systemic stability. Time is of the essence.
- Progress is required on all elements. A single supervisory mechanism (SSM) must ultimately supervise all banks, with clarity on duties, powers and accountability, and adequate resources. But without common resolution and safety nets and credible backstops, an SSM alone will do little to weaken vicious sovereign-bank links; they are necessary also to limit conflicts of interest between national authorities and the SSM. A single resolution authority, with clear ex ante burden-sharing mechanisms, must have strong powers to close or restructure banks and be required to intervene well ahead of insolvency. A common resolution/insurance fund, sized to resolve some small to medium bank failures, with access to common backstops for systemic situations, would add credibility and facilitate limited industry funding.
- The challenge for policymakers is to stem the crisis while ensuring that actions dovetail seamlessly into the future steady state. Hence, agreeing at the outset on the elements, modalities, and resources for a banking union can help avoid the pitfalls of a piecemeal approach and an outcome that is worse than at the start. The December 2012 European Council agreement on an SSM centered at the European Central Bank (ECB) is an important step, but raises challenges that should not be underestimated. Meanwhile, to delink weak sovereigns from future residual banking sector risks, it will be important to undertake as soon as possible direct recapitalization of frail domestically systemic banks by the European Stability Mechanism (ESM). Failing, non-systemic banks should be wound down at least cost, and frail, domestically systemic banks should be resuscitated by shareholders, creditors, the sovereign, and the ESM.
- A banking union is necessary for the euro area, but accommodating the concerns of non-euro area European Union (EU) countries will augur well for consistency with the EU single market.
Views from Japan: Comments on the incidents with China's naval forces
Q&A session with "aki", a Japanese citizen, on contemporary politics
Q: Maybe you'd like to publish some short comments on the incidents with China's naval forces
A: yes, i've been interested in it indeed.
Chinese government seems pushing themselves to the edge of cliff. they are scared of that their citizens make disorder against the them, so they need to make "scapegoats" outside of the country to distract the people's view to protect themselves.
recently Chinese citizens' been tending to show their frustration to the government, because of the corruptions of politics and unfair distribution of wealth.
they are trying to make Japan the "scapegoat" now. but the government of Japan never reacted their provocations, just do what we should do in internationally "right" way. that makes China nervous - if they stimulate japan more, they will be censured in the world, but never can show their citizens compromising attitude... these days, their behavior looks like north Korea's. never look they are the economically 2nd biggest country.
need to watch it carefully. (personally, a sort of fun to see how they do)
aki
Q: Maybe you'd like to publish some short comments on the incidents with China's naval forces
A: yes, i've been interested in it indeed.
Chinese government seems pushing themselves to the edge of cliff. they are scared of that their citizens make disorder against the them, so they need to make "scapegoats" outside of the country to distract the people's view to protect themselves.
recently Chinese citizens' been tending to show their frustration to the government, because of the corruptions of politics and unfair distribution of wealth.
they are trying to make Japan the "scapegoat" now. but the government of Japan never reacted their provocations, just do what we should do in internationally "right" way. that makes China nervous - if they stimulate japan more, they will be censured in the world, but never can show their citizens compromising attitude... these days, their behavior looks like north Korea's. never look they are the economically 2nd biggest country.
need to watch it carefully. (personally, a sort of fun to see how they do)
aki
Tuesday, February 12, 2013
Mortgage insurance: market structure, underwriting cycle and policy implications - Consultative paper released by the Joint Forum
Mortgage insurance: market structure, underwriting cycle and policy implications - Consultative paper released by the Joint Forum
February 2013
- Policymakers should consider requiring that mortgage originators and mortgage insurers align their interests;
- Supervisors should ensure that mortgage insurers and mortgage originators maintain strong underwriting standards;
- Supervisors should be alert to - and correct for - deterioration in underwriting standards stemming from behavioural incentives influencing mortgage originators and mortgage insurers;
- Supervisors should require mortgage insurers to build long-term capital buffers and reserves during the valleys of the underwriting cycle to cover claims during its peaks;
- Supervisors should be aware of and mitigate cross-sectoral arbitrage which could arise from differences in the accounting between insurers' technical reserves and banks' loan loss provisions, and from differences in the capital requirements for credit risk between banks and insurers; and
- Supervisors should apply the FSB Principles for Sound Residential Mortgage Underwriting Practices ("FSB Principles") to mortgage insurers noting that proper supervisory implementation necessitates both insurance and banking expertise.
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