Banking Contracts Research Articles

A frictionless economy with suboptimizing agents

The existence of short-term monetary equilibrium in a frictionless economy with suboptimal agents is proved for any (reasonable) given interest rate. Money is distinguished from monetary assets. Separability ideas (as defined in decision theory) are applied. Two financial markets are in operation: for bank contracts (deposits and credits) and for shares.

EC Financial Services and Contract Law – Developments 2007–2010

The contribution is a follow-up on the overview published in ERCL 2008, 45 and covers the latest developments from 2007 through the first half of 2010. The law with respect to prudential supervision has changed little; there are, however, changes underway as a reaction to the financial crisis (see section I). More importantly, however, contract law developed considerably. Important new legislation has been adopted in the area of commercial banking, while the Market in Financial Instruments Directive of 2004 (MiFID) and its transposition were at the centre of the last report. New legislation has now been adopted in the other two important sectors of banking business and thus the series of second generation of banking law directives is complete. In the area of bank loans, harmonisation has changed considerably with the new EU Consumer Credit Directive of 2008. In the area of the payment business, changes have been even more drastic, as virtually all payment instruments have now been harmonised with the new EU Payments Systems Directive of late 2007, and this not only for the consumer area. This directive now covers: credit transfers, credit and debit cards, and direct debits. The importance of the new material makes it necessary to concentrate on these two measures mainly (sections II and III) and to add only two short sections on important developments under the MiFID (section IV) and on some general considerations concerning the overall picture now reached in European Banking Contract Law (section V).

La oposición por pluspetición a la ejecución del contrato bancario de descuento

Certain banking practice generally accepted to come covered in contracts drawn up unilaterally by the bank itself, violate both user rights as the very rules governing the financial field. Among the wide variety of banking contracts, we focus on the study of contract discount is especially relevant where the charging of fees for repayment of unpaid bills and implementation of a high percentage interest in the operation well above the legal interest of money. In this paper we provide some solutions for the defense customer/consumer cope with the demands of implementation processes based on discount policies and enforcement.

Bank incentives, contract design and bank runs

We study the Diamond–Dybvig [Bank runs, deposit insurance, and liquidity, J. Polit. Econ. 91 (1983) 401–419] model as developed in Green and Lin [Implementing efficient allocations in a model of financial intermediation, J. Econ. Theory 109 (2003) 1–23] and Peck and Shell [Equilibrium bank runs, J. Polit. Econ. 111 (2003) 103–123]. We dispense with the notion of a bank as a coalition of depositors. Instead, our bank is a self-interested agent with a technological advantage in record-keeping. We examine the implications of the resulting agency problem for the design of bank contracts and the possibility of bank-run equilibria. For a special case, we discover that the agency problem may or may not simplify the qualitative structure of bank liabilities. We also find that the uniqueness result in Green and Lin [Implementing efficient allocations in a model of financial intermediation, J. Econ. Theory 109 (2003) 1–23] is robust to our form of agency, but that the non-uniqueness result in Peck and Shell [Equilibrium bank runs, J. Polit. Econ. 111 (2003) 103–123] is not.

Islamic Contracts in a Secular Court Setting? Lessons From Malaysia

AbstractThe judgement in the Kuala Lumpur High Court in the case of Affin Bank Berhad v. Zulkifli Abdullah ([2006] 1 CLJ 438) illustrates the difficulty in cases where Islamic principles such as Bay' Bithaman Ajil or BBA are litigated in a court of law where Islamic Shariah is little understood. From the traditional Islamic law perspective the legal basis arrived at in the judgement is questionable. In the light of this complexity, this article attempts to analyse the effect of the judgement to the principles of Islamic contracts used in banking products and services in Malaysia with reference to the sources used in the creation of the contracts and forum to settle disputes between Islamic Banks and their customers. In conclusion, this article would argue for the appropriate application of the Shariah in the above matters through the promulgation of a specific law in relation to Islamic contracts in banking and finance or alternatively a special procedure to be introduced enabling all matters relating to the question of Shariah be referred to the Shariah Courts for decision.

The 2006 Summer Workshop on Money, Banking, and Payments: An Overview

This PDP summarizes the papers presented at the 2005 Summer Workshop on Money, Banking, and Payments at the Cleveland Fed. Papers covered a wide variety of topics in monetary theory and policy, banking, and payments systems research. Topics ranged from optimal monetary policy, optimal bank contracts, the private supply of money, the coexistence of credit, money, and capital, the design of payment systems, and international currencies. Effort was made to calibrate models and bring them closer to the data. These contributions illustrate the progress made in the field of monetary theory.

The Walsh contract for central bankers proves optimal after all!

A recent paper argues that the Walsh linear inflation contract does not prove optimal when the government concerns itself about the cost of the central bank contract (Candel-Sanchez & Campoy-Minarro, 2004). This result relies on assuming that the participation constraint does not represent an effective constraint on the central banker’s decision. We show that the Walsh linear inflation contract does produce the optimal outcome, even when the government cares about the cost of the contract, assuming that the participation constraint holds.

Asset Diversion, Input Allocation and Capital Structure

The paper investigates the determinants of bank and trade credit demands and their interactions with the input combination optimally chosen by the entrepreneur, within an incomplete contract setting with uncertainty, two-input technology and collateralized credit contracts. Besides the traditional financing motive, the paper isolates two other reasons for trade credit demand: trade credit provides commitment to the otherwise unobservable input combination specified in the bank contract and it is taken for liquidation motive. The paper provides a theoretical foundation for several stylized facts for which the extant literature lacks a clear understanding: (1) why suppliers do not traditionally lend cash; (2) why wealthy firms, unconstrained on bank credit, ask for trade credit; (3) why, in some circumstances, suppliers have the full priority in repossessing the collateral assets in case of bankruptcy; (4) why firms located in countries with a weaker creditor protection invest relatively more in tangible assets.

Discretionary Contracts and Bank-Firm Relationships

This paper provides a rationale for the use of discretion in bank loan contracts. Discretion allows banks which produce information on borrowers to optimally adapt contract terms to 'soft' or non-verifiable information in the course of lending. This facilitates investment efficiency and also allows for wealth redistributions in favor of firms with good investment opportunities. I show that the optimality of discretion depends critically on bank quality and the degree of lender competition. If bank quality is low and/or lender competition is limited, enforceable bank contracts and financial market contracts dominate discretionary contracts. I also show that the relative importance of bank vis-a-vis financial market financing is non-monotonic in borrower quality. The analysis has implications for the competitive position and the optimal organizational structure of banks, and emphasizes the value of relationship lending in an increasingly competitive environment.

SchlumbergerSema wins Chinese bank contract

SchlumbergerSema wins Chinese bank contract

Financial Contract Design in the World of Venture Capital

Recent scholarship has described a venture capital cycle which finances start-up technology companies. This cycle, however, bears striking similarities with its counterpart in the old economy under which banks financed young firms. Indeed, with one notable exception, venture capital has introduced little innovation in financial contract design between financial intermediaries and entrepreneurs. The same approaches to information problems are used by banks and venture capital partnerships alike. The significant exception is the frequent use in venture capital finance of convertible instruments in the place of secured debt financing by banks. This paper explains (i) the functional similarity between venture capital and bank contracts with entrepreneurs and (ii) the valuable role played by convertible debt or preferred stock in technology start-ups.

In Offense of Usury Laws: Microfoundations of Illegal Credit Contracts

Several European countries base their anti-usury laws on the definition of interest ceilings. Underlying this approach is the identification of high interest rates with the usurious nature of the relative credit contract; hence usury is nothing more than a particularly onerous credit contract. The present paper contradicts this traditional view by presenting a general micro-founded model of credit contracts that arrives at a few conclusions, before in a static and then in a dynamic contest. Firstly, it demonstrates the specificity of the usury contract with respect to the bank contract, pointing up the particular nature of those who supply and demand usurious credit. Secondly, it demonstrates that in environmental situations with little protection of property rights and a propensity to illegality, the decision of a borrower to turn to a usurer may be efficient from the Pareto standpoint and thus not the result of a rationing equilibrium in the bank credit market, as is commonly thought. Thirdly, it deduces from this the insubstantial link between “interest rate level and the usurious nature of the contract.” Hence two consequences for policy: (a) it is more effective to combat usury by improving the laws and law enforcement to better protect property rights, rather than introduce rate ceilings; and (b) in any case, the usury market can be reduced but not eliminated, since it is a meeting place for particular borrowers and lenders of funds.

How New Zealand Consumers Respond to Plain English

In recent years New Zealand has seen an increasing awareness of the need forand the benefits of providing readily understandable business and government documents. In this paper I report a psycholinguistic study testing the level of consumer comprehension of bank contracts and the effect of using plain English torewrite them. The plain versions encouraged subjects to read the documents morecarefully than they read the original versions, and the subjects understood the content and implications better when the contracts were written in plain English. Themost effective means of enhancing comprehension was that which included bothlexical and syntactic manipulation of text. Subjects said that they preferred theplain English versions of the contracts to the traditional versions.

Haru Yamada, Different games, different rules: Why Americans and Japanese misunderstand each other. Foreword by Deborah Tannen. Oxford & New York: Oxford University Press, 1997. Pp. ix, 166. Hb $24.00.

A prevailing fear of ambiguity, coupled with a global business imperative, has given birth to a new readership for the Japan-book trade. This new market, a large and lucrative one, is for general-interest books targeted at those who read about Japan not because they want to, but because they think they must in order to “succeed.” However, another book focused on Japanese and American communication may still hold the potential to teach us something new and valuable. A recent addition to this burgeoning literature is the book under review. Yamada has a lively writing style, a graceful use of metaphor and stories, and a Tannenesque “linguistics for the masses” formula to lead the reader through a few areas of probable communicative misunderstanding. On the basis of anecdotes, fables, TV dramas, samurai movies, proverbs, and some of her own previously published findings on bank contract meetings, Yamada sets out what she sees as the crucial discrepancies between American and Japanese conversational styles. These are easily summarized with her repeated characterizations of each group: Americans are independent and individualistic, and use explicit language, while Japanese are interdependent and group-oriented, and use implicit language.

Default and Renegotiation in Financial Distress in the Multiple Bank Model: An Analysis of the Main Bank System

This paper explores whether the “main bank system” in Japan can be explained by a self-enforcing mechanism that motivates delegated monitorin g creditors to be committed not to execute inefficient liquidation even though all agents are risk-neutral. Using a multiple bank model, we specify a standard debt contract equilibrium in which the delegated monitoring creditor does not care about her reputation, and a main bank contract equilibrium in which the delegated monitoring creditor will attempt to honour the loan contract so as not to destroy her reputation. The results show that, under certain conditions, any equilibrium standard debt contract is dominated by an equilibrium main bank contract in which the debtor and the delegated monitoring creditor are strictly better off. Furthermore, the equilibrium main bank contract reflects the prominent features observed in actual bank loan contracts in Japan. JEL Classification Numbers: D82, G21, G33, G34

Is New Zealand's Reserve Bank Act of 1989 an Optimal Central Bank Contract?

This paper evaluates the Reserve Bank of New Zealand Act of 1989 from a principal-agent perspective, arguing that the act represents a dismissal rule. The optimal dismissal rule requires that the central banker be dismissed whenever inflation exceeds a critical level that depends on aggregate supply disturbances and measurement error in the inflation index. This is essentially the structure established by the act. The scope for renegotiating the target rate, however, creates an incentive for the government to set the critical rate too high. Consequently, the inflation bias of discretion is reduced but not completely eliminated. Copyright 1995 by Ohio State University Press.

Speculative bubbles, speculative attacks, and policy switching : Robert P. Flood and Peter M. Garber. Cambridge, MA: The MIT Press, 1994. 493 pp. $50.00 ISBN 0-262-06169-4

Part 1 Speculative bubbles: market fundamentals versus price-level bubbles - the first tests, Robert P. Flood and Peter M. Garber famous first bubbles, Peter M. Garber tulipmania, Peter M. Garber on testing for speculative bubbles, Robert P. Flood and Robert J. Hodrick an evaluation of recent evidence on stock market bubbles, Robert P. Flood et al asset price volatility, bubbles, and process switching, Robert P. Flood and Robert J. Hodrick on the equivalence of solutions in rational expectations Models, Edwin Burmeister et al multi-country tests for price-level bubbles, Robert P. Flood et al. Part 2 Speculative attacks: collapsing exchange-rate regimes, Robert P. Flood and Peter M. Garber gold monetization and gold discipline, Robert P. Flood and Peter M. Garber recurrent devaluation and speculative attacks on the Mexican peso, Herminio Blanco and Peter M. Garber the Belmont-Morgan Syndicate as an optimal investment banking contract , Peter M. Garber and Vittorio U. Grilli real aspects of exchange-rate regime choice with collapsing fixed rates, Robert P. Flood and Robert J. Hodrick exchange-rate regimes in transition - Italy 1974, Robert P. Flood and Nancy P. Marion the linkage between speculative attack and target zone models of exchange rates - some extended results, Robert P. Flood and Peter M. Garber. Part 3 Policy switching: a model of stochastic process switching, Robert P. Flood and Peter M. Garber an economic theory of monetary reform, Robert P. Flood and Peter M. Garber process consistency and monetary reform - some further evidence, Robert P. Flood and Peter M. Garber nominal contracts in a bimetallic standard, Peter M. Garber monetary policy strategies, Robert P. Flood and Peter Isard transition from inflation to price stability, Peter M. Garber comment on bringing down inflation, Robert P. Flood.

RISK SHARING BETWEEN A MAIN BANK AND BORROWING COMPANIES UNDER INDEXED CONTRACTS

RISK SHARING BETWEEN A MAIN BANK AND BORROWING COMPANIES UNDER INDEXED CONTRACTS

Asymmetric information, investment banking contracts and the certification hypothesis

This study posits a hierarchy of investment banking contracts reflecting differential levels of certification. The analysis supporting the existence of this hierarchy is based on the reputational capital paradigm. The firm commitment-negotiated arrangement is perceived to have the highest quality of certification, followed by the firm commitment-competitive, best efforts-negotiated and best efforts-competitive arrangements in that order. The existence of this hierarchy is investigated by measuring market reactions to the announcements of such issues. The empirical results reveal sharp distinctions between firm commitment and best efforts contracts. However, within firm commitment contracts, signalling between negotiated and competitive arrangements is attentuated and the distinction is weak.

Overtime scrapped for bank contracts.

Management at Liverpool's Alder Hey Hospital Trust have angered nurses by scrapping overtime and asking them instead to fill service gaps as bank staff.