We consider a model in which banks face two moral hazard problems: 1) asset substitution by shareholders, which can occur when banks make socially-inefficient, risky loans; and 2) managerial under-provision of effort in loan monitoring. The privately-optimal level of bank leverage is neither too low nor too high: It efficiently balances the market discipline that owners of risky debt impose on ...

The purpose of this research is to examine the effect Islamic leadership and work ethics on employee performance banks in Riau province, whereby organizational culture became mediator variable. This employs Structure Equation Model (SEM) based Partial Least Square (PLS) with help SmartPLS 3.0 M3 software. data were collected by using a questionnaire from 275 respondents. respondent was an Provi...

Borrower-based macroprudential (MP) policies - such as caps on loan-to-value (LTV) ratios and debt-service-to-income (DSTI) limits contain the build-up of systemic risk by reducing probability conditional impact a crisis. While LTV/DSTI can increase inequality at introduction, they dampen in under adverse macroeconomic conditions. The relative size these opposing effects is an empirical questio...

In the recent recession and current economic recovery, policymakers have supported asset prices in the U.S. treasury and mortgage markets, expecting that improvement in the balance sheet of banks will lead to more commercial lending. In general, we document that increases in housing prices in a bank’s deposit base lead banks to decrease commercial lending. Further, we find that a one-standard d...

Some advocates of far higher capital requirements for banks invoke the Modigliani-Miller theorem as grounds for judging that associated costs would be minimal. The M&M theorem holds that the average cost of capital to the firm is independent of capital structure, because any reduction in capital cost from switching to higher leverage using lowercost debt is exactly offset by an induced increase...

Recent history suggests that many boom-bust cycles are naturally driven by linkages between the credit market and asset prices. Additionally, new structured securities have been developed, e.g., MBS, CDOs, and CDS, which have acted as instruments of risk transfer. We show that there is a certain non-robustness in the pricing of these instruments and we create a model in which their role in the ...

We consider a model in which banking is characterized by asset substitution moral hazard and managerial under-provision of effort in loan monitoring. The privately-optimal bank leverage efficiently balances the benefit of debt in providing the discipline to ensure that the bank monitors its loans against the benefit of equity in attenuating asset-substitution moral hazard. However, when correla...

Payments systems operate virtually unnoticed in our daily lives and yet are crucial to a wellfunctioning economy and financial system. Because they explicitly link financial institutions, payments systems provide a way to transmit risk within, and between, financial systems. Ideally, payments systems should be designed and operated so as not to add risk in the event of a crisis. The author exam...

This paper attempts to provide a critical appraisal of the debate on the effectiveness of microfinance as a universal poverty reduction tool. It argues that while microfinance has developed some innovative management and business strategies, its impact on poverty reduction remains in doubt. Microfinance, however, certainly plays an important role in providing safety-net and consumption smoothen...

I evaluate a bank’s incentives to implement a risk sensitive regulatory capital rule. The decision making is analyzed within a real options framework where optimal policies are derived in terms of threshold levels of risk. The bank’s customers, lenders, and other outsiders may influence the optimal decision. Outsiders may make it optimal for the bank to implement the risk sensitive rule earlier...