Abstract
This dissertation explores two interrelated aspects of banking crises and bank regulations in perspective of regulator¡¦s soft budget constraints (SBCs in brief) and bank top management compensation.
First, this paper models, in a game of incomplete information, bank behavior during banking crises when asymmetric information exists between regulators and banks. Here, I show that the situation creates the incentives for banks to roll over their defaulting loans to disguise their financial statements. Although a prudential regulator may mitigate this incentive by offering a ¡§slack¡¨ rescue packages, the bank¡¦s reputational concern may cause them to reject rescue offers. In this instance, regulators may be forced to offer amounts of recapitalization that will meet the amount necessary to restore banks to solvency. Otherwise, banks may have to gamble for resurrection, or wait until the banking crises become severe, and then more banks become insolvent, regulators have to offer optimal rescue packages subject to SBCs.
New findings include (1) During banking crises, the optimal regulatory policies, on the one hand, may cause regulators have to offer rescue or bailout packages subject to different SBCs, on the other hand, mitigate banker¡¦s moral hazard. The more severe the crises will be, the greater soft budget constrained to regulators. (2) The potential severity of banking crises can be measured by the ratios, getting from net worth over the total amount of recapitalization offered by regulators and recovered from nonperforming loans. (3) As banking crises become severe, the cost of rescue becomes larger than that of bailout, the best regulatory policy is to intervene; On the contrary, if a situation labeled ¡§ too-many-to-fail¡¨ arises, the regulators may offer to rescue distressed banks subject to SBC. (4)As Bayesian equilibrium cost of regulator in crises is increasing, a random creative ambiguity for regulators to offer bailout or rescue plans may be the optimal policy to mitigate the expectation of SBC for banks .
Second, this paper also shows that in the circumstances of universal banking or bank holding company, concentrating bank regulation on bank capital ratios and risk-based deposit insurance may be ineffective in controlling banker¡¦s risk-taking and moral hazard. Here, this paper follows, a more direct mechanism of influencing bank risk-taking incentives, in which the insurance premium scheme incorporate features of top management compensation. In a model of universal banking with two-periods and three-subsidiaries or departments, bank owner pre-commits to regulators to pick an optimal management compensation structure that induces the first-best value-maximizing investment choices by a bank¡¦s management.
Findings include (1) If insurance premium is not fairly priced, the incentives are created for banks to have a ¡§regulatory arbitrage¡¨ by segregating its nonperforming assets from the investment bank, and shift it to the commercial bank, that increases the deposit-insurer an additional risk liability, and aggravates the risk-shifting within the universal bank; and vice versa. (2) Given management contracts{ fixed salary, a bonus paid, a fraction of equity of the bank} and { fixed salary, a penalty , a fraction of equity}for bank and security investment department respectively ; and a capitalization level corresponding must exceed the lower risky investment outcome , here bonus paid larger than 0, a penalty larger than 0, a fraction of equity between 0 and 1, then the investment policies implemented by managers, is less risky than when manger¡¦s interests are fully aligned with the equity interests. (3) Given a fairly priced insurance premium, and capitalization level corresponding must exceed the lower risky investment outcome, then the optimal management compensation structure can internalize the cost of moral hazard and induce the Pareto-optimal and department-equilibrium investment policies, thus mitigate moral hazard under universal banking.
Finally, the state-owned and half-state-owned banks have experienced the institution-induced ineffectiveness; and the latter suffer from poor business performance level, partially because of the issues of ownership structure. This paper shows the investment policy with moral hazard under these banks incorporated with optimal compensation structures, and given capitalization level corresponding must exceed the lower risky investment outcome, then the optimal policies induced, that will improve their business performance level.
This paper also shows that as the controlling shareholders have power over banks in excess of their cash flow rights, the incentives will be created for them to expropriate the minority shareholders. And, when the incentives for expropriation exists, the investment policy will be distorted with the managerial bias induced by their private benefits, and deteriorate morale of the banks. The regulatory mandatory requirements of one-share-one-vote principle may be proposed, instead.
| Identifer | oai:union.ndltd.org:NSYSU/oai:NSYSU:etd-0927104-162209 |
| Date | 27 September 2004 |
| Creators | Chang, Ching-ming |
| Contributors | Trugin Liu, none, none, Leonard F.S Wang, none, Szu-Lang Liao |
| Publisher | NSYSU |
| Source Sets | NSYSU Electronic Thesis and Dissertation Archive |
| Language | Cholon |
| Detected Language | English |
| Type | text |
| Format | application/pdf |
| Source | http://etd.lib.nsysu.edu.tw/ETD-db/ETD-search/view_etd?URN=etd-0927104-162209 |
| Rights | unrestricted, Copyright information available at source archive |
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