The Unholy Trinity: Regulatory Forbearance, Stressed Banks and Zombie Firms

AbstractThis paper investigates risk-based premiums in ex-ante insurance guaranty schemes. Exchange rate risk is incorporated into the asset portfolio to reflect the growing practice of life insurers taking offshore risks for yield enhancement. The closed-form solutions of the risk-based premium charged by the insurance guaranty fund are derived. Our premium rating includes currency mismatches between assets and liabilities, and the effects of early closure, capital forbearance, and grace periods are fully explored. First, we discover that the insurance guaranty fund premium is underestimated if currency fluctuation uncertainty is overlooked. Second, the premium is higher under regulatory forbearance than it is under the Merton stock put option, which implies that the cost is substantial. Finally, we note that the premium increases with higher financial leverage and greater foreign exposure in the asset portfolio. The results of our analysis provide further insight for regulators to implement regulatory policies and insurance guaranty schemes.

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Bank Valuation and Regulatory Forbearance During a Financial Crisis

SSRN Electronic Journal ◽

10.2139/ssrn.1434359 ◽

2010 ◽

Cited By ~ 5

Author(s):

Harry Huizinga ◽

Luc A. Laeven

Keyword(s):

Financial Crisis ◽

Regulatory Forbearance

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Regulatory Forbearance in the U.S. Insurance Industry: The Effects of Removing Capital Requirements for an Asset Class

Review of Financial Studies ◽

10.1093/rfs/hhab102 ◽

2021 ◽

Author(s):

Bo Becker ◽

Marcus M Opp ◽

Farzad Saidi

Keyword(s):

Insurance Industry ◽

Capital Requirements ◽

Insurance Companies ◽

High Yield ◽

Capital Regulation ◽

Fixed Income ◽

Portfolio Holdings ◽

Asset Class ◽

Regulatory Forbearance ◽

The U.S

Abstract We analyze the effects of a reform of capital regulation for U.S. insurance companies in 2009. The reform eliminates capital buffers against unexpected losses associated with portfolio holdings of MBS, but not for other fixed-income assets. After the reform, insurance companies are much more likely to retain downgraded MBS compared to other downgraded assets. This pattern is more pronounced for financially constrained insurers. Exploiting discontinuities in the reform’s implementation, we can identify the relevance of the capital requirements channel. We also document that the insurance industry crowds outs other investors in the new issuance of (high-yield) MBS.

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Politically Robust Financial Regulation

IMF Working Papers ◽

10.5089/9781513566375.001 ◽

2021 ◽

Vol 21 (1) ◽

Author(s):

Itai Agur

Keyword(s):

Financial Regulation ◽

Regulatory Policy ◽

Time Consistency ◽

Best Interest ◽

Political Pressure ◽

The Public ◽

Regulatory Instruments ◽

Policy Credibility ◽

Time Inconsistent ◽

Regulatory Forbearance

The deferred recognition of COVID-induced losses at banks in many countries has reignited the debate on regulatory forbearance. This paper presents a model where the public's own political pressure drives regulatory policy astray, because the public is poorly informed. Using probabilistic game stages, the model parameterizes how time consistent policy is. The interaction between political motivations and time consistency is novel and complex: increased policy credibility can entice the politically-motivated regulator to act in the public's best interest, or instead repel it from doing so. Considering several regulatory instruments, the paper probes the nexus of political pressure, perverse bank incentives and time inconsistent policy.

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Deposit Insurance, Regulatory Forbearance and Economic Growth: Implications for the Japanese Banking Crisis

10.24148/wp2004-26 ◽

2004 ◽

pp. 1.000-42.000 ◽

Cited By ~ 7

Author(s):

Robert Dekle ◽

◽

Kenneth M. Kletzer ◽

Keyword(s):

Economic Growth ◽

Deposit Insurance ◽

Banking Crisis ◽

Regulatory Forbearance

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Diffuse interest groups and regulatory policy change: Financial consumer protection in Turkey

10.31219/osf.io/f6t5y ◽

2021 ◽

Author(s):

Mehmet Kerem Coban

Keyword(s):

Interest Groups ◽

Policy Change ◽

Consumer Protection ◽

Regime Change ◽

Banking Sector ◽

Regulatory Policy ◽

Retail Banking ◽

Policy Regime ◽

State Actor ◽

Regulatory Forbearance

This article examines why and how a regulation on retail banking fees, commissions, and charges emerged in Turkey after a long period of regulatory forbearance. The article shows that when regulatory forbearance caused stasis, and the “statist”, exclusionary policymaking context limited consumer groups’ access to the policymaking process, consumer groups challenged the policy regime of the banking sector and the regulator by appealing to another state actor, the Ministry of Customs and Trade. The Ministry took advantage of an opportunity structure to pass a new consumer protection law which assigned a de facto mandate on the regulatory agency to regulate fees, commissions, and charges. The article argues that the regulatory policy change was a product of a policy regime change with the Ministry emerging as a veto player, as it redefined the institutional arrangements in the policymaking process, and imposed its preferences and its stricter policy approach. As such, the article contributes to our understanding of the conditions of how diffuse interest groups can trigger regulatory policy change, but more importantly policy regime change.

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