Market-based Financing Research Articles

Market-Based Finance, Debt and Systemic Risk: A Critique of the EU Capital Markets Union

Modern, globalised financial markets are the offspring of a process of liberalization of capital that started with the collapse of Bretton Woods in the 1970s and culminated with a number of regulatory changes in the 1980s and 1990s. As a consequence of that process, financial markets have grown dramatically and become increasingly integrated at a global level. Importantly, the growth and innovation that occurred over the past decade has taken place in the realm of capital market finance, and in particular in the context of market-based channels that revolved chiefly around securitisation and repo transactions. As a result, new debt transactions and products have been engineered since the 1980s. This article contends that, contrary to conventional belief, the excessive development of market-based channels of finance has been one of the catalysts behind the crises and scandals exploded over the past fifteen years. In particular, the employment of innovative debt transactions was instrumental to the creation of excessive levels of risk-taking and leverage. These had catastrophic consequence, both at firm level and at systemic level. Notwithstanding the regulatory measures that have been enacted over the past fifteen years, the way in which debt transactions in capital markets are designed and entered into remains lightly or indirectly regulated. Moreover, regulators have so far neglected the role that leverage and debt creation have in the economy and the consequence that these phenomena have on the wider social context. On the contrary, recently the EU has promoted the implementation of an old design, namely the Capital Markets Union (CMU). This revolves around market-based forms of financing, which should represent an alternative to the traditionally predominant (in Europe) bank-based financing channels. This article contends that the CMU framework fails to appreciate the dangers associated with capital markets finance and its ensuing debt creation effects. It argues that, despite some regulatory efforts, a suitable architecture for the regulation of market-based channels of finance is still missing.

Coordinating Monetary and Financial Regulatory Policies

I study monetary and macro-prudential policy intervention in a general equilibrium economy with recurrent boom-bust cycles. Recurrence causes forward-looking variables to also react to policy intervention during phases in which the intervention is inactive. Macro-prudential policies that contain systemic risk in financial markets during booms, therefore, relax market-based funding constraints during busts, which helps mitigate the severity and shorten the duration of economic meltdowns. Contractionary monetary interventions during booms also have (latent) beneficial effects during busts. Coordination between the two policy instruments improves social welfare over standard, non-coordinated policy interventions, but improvement is moderate.

Impact of market-based finance on SMEs failure

Capital Market-Based financing for Small and Medium-sized Enterprises (SMEs) is increasingly viewed as complementary to traditional bank-based financing for SMEs. In response, policymakers are recognising the need for better access of SMEs to capital markets and are making efforts to remove major impediments to their participation in capital markets. Thus, SMEs listed on stock exchanges benefit from better access to finance and reduced information asymmetry than their unlisted counterparts. This in turn shall lead to lower failure likelihood of listed SMEs. In this study, we empirically test this hypothesis and report that listed SMEs enjoy a lower likelihood of financial distress and bankruptcy than their unlisted counterparts. Although factors affecting financial distress of both listed and unlisted SMEs are almost identical, Average Marginal Effects of respective factors are strikingly higher for their unlisted counterparts. This suggests a higher vulnerability of unlisted SMEs due to changes in financial ratios. Due to the extremely low number of legal bankruptcy events, our hypothesis finds weak support when bankruptcy is used as the dependent variable in the regression analysis. Broadly, our findings support the view that stock exchange listing can relieve SMEs from external financing constraints, thus reducing their failure likelihood.

Corporate governance, capital market orientation and firm performance: empirical evidence for large publicly traded German corporations

The relationship between corporate governance and firm performance, with an emphasis given to the question of whether capital market-oriented funding policies are more efficient when compared to their bank-related counterparts, has not been explicitly investigated despite its high importance for the legitimation of the regulatory policy in the EU and its member states. The paper at hand wants to fill this gap by empirically analyzing this question utilizing two panels of publicly traded German corporations. By using a ratio measuring the scope of capital market-based funding as well as further hand-collected corporate governance variables incorporating different groups of stakeholders, we investigate the determinants of firm performance expressed by accounting-based and/or market-based indicators. The results show that capital market-based funding has an ambiguous and time-varying impact on firm performance, while ‘strategic attributes’ and ‘governance attributes’ play very important roles as in particular organizational features might complement performance effects by providing safeguards in times of crisis. Taken together, our empirical findings imply that the ‘capital market-oriented firm’ is not an appropriate point of reference to capture the de facto behavior of large German corporations. Given this, regulatory bodies might be well-advised to develop alternative ‘role models’ for future corporate governance-related regulatory activities.

Searching for the public: school funding and shifting meanings of ‘the public’ in Australian education

School funding is a principal site of policy reform and contestation in the context of broad global shifts towards private- and market-based funding models. These shifts are transforming not only how schools are funded but also the meanings and practices of public education: that is, shifts in what is ‘public’ about schooling. In this paper, we examine the ways in which different articulations of ‘the public’ are brought to bear in contemporary debates surrounding school funding. Taking the Australian Review of Funding for Schooling (the Gonski Report) as our case, we analyse the policy report and its subsequent media coverage to consider what meanings are made concerning the ‘publicness’ of schooling. Our analysis reveals three broad themes of debate in the report and related media coverage: (1) the primacy of ‘procedural politics’ (i.e. the political imperatives and processes associated with public policy negotiations in the Australian federation); (2) changing relations between what is considered public and private; and (3) a connection of government schooling to concerns surrounding equity and a ‘public in need’. We suggest these three themes contour the debates and understandings that surround the ‘publicness’ of education generally, and school funding more specifically.

Market-based financing in the Capital Markets Union: The European Commission’s Proposals to Foster Financial Innovation in the EU

Market-based financing in the Capital Markets Union: The European Commission’s Proposals to Foster Financial Innovation in the EU

Financialisation in emerging economies: a systematic overview and comparison with Anglo-Saxon economies

Financialisation research has originally focussed on the US experience, but the concept is now increasingly applied to emerging economies (EMEs). There is a rich literature stressing peculiarities of individual country experiences, but little systematic comparison across EMEs. This paper fills this gap, providing an overview of the debate and identifying six financialisation interpretations for EMEs. These different interpretations stress (1) financial deregulation, (2) foreign financial inflows, (3) asset price volatility, (4) the shift from bank-based to market-based finance, (5) business debt, and (6) household indebtedness. We construct and compare measures of the six financialisation interpretations across a sample of 17 EMEs from Latin America, emerging Europe, Africa and Asia, contrasting them with the US and UK, two financialised economies. We find considerable variation in financialisation experiences of EMEs. Asset price volatility is found across the continents. Asia has been more exposed to capital inflows, stock markets have gained importance and private sector debt has risen. In emerging Europe financial deregulation has been more pronounced with lower levels but strong increases in household debt. The picture is similar in South Africa, the African EME in the sample, where household debt is comparatively high. Financialisation in Latin America is weaker according to our measures.

Bank-Based Versus Market-Based Financing: Implications for Systemic Risk

Against the background of the great financial crisis, this paper assesses the merits of bank-based versus market-based financing by exploring the relationship between financial structure and systemic risk. The findings indicate that bank-based financial structures are associated with higher systemic risk than market-based financial structures. In relatively bank-based financial structures, bank financing is found to increase systemic risk while market financing decreases systemic risk. By contrast, in relatively market-based financial structures, bank and market financing do not impact systemic risk. Together, the results signal that market-based financial structures are more resilient to systemic risk.

Zur Kritik der Kapitalmarktunion

This article examines the European Commission’s proposal to establish a Capital Markets Union through facilitated marketbased financing, prominently cross border securitisation. However, facilitated securitisation might raise systemic risks through a deteriorated term transformation, imperfect risk transfer and excessive leverage. It might create a new liquidity glut completely separated from the needs of the real economy. In addition, this concept is contradictory to previous efforts to properly supervise, regulate and control the European financial markets. The essay favours a regulation and control approach combined with extensive EU reforms of the financial sector.

Central counterparties and sale and repurchase agreements: regulating financial markets in the light of yet another false dawn

ABSTRACTIn this article it is argued that the burgeoning faith of policymakers and regulators in the ability of central counterparties (‘CCPs’) to absorb both counterparty and collateral risk in ‘sale and repurchase agreements’ (otherwise known as ‘repos’) – and, in turn, in helping to forestall contagion in the form of so-called ‘repo runs’ – is misplaced. In developing this contention, three major claims are advanced. First, for all their benefits, CCPs exhibit a major design flaw in as much as they are unable to diversify away market-wide systemic risk when counterparty failures become correlated – as exemplified by the global financial crisis (‘GFC’). Second, this design flaw is remarkably similar to the flaw which the modern trend towards market-based finance exhibits, again, as revealed during the GFC, and as persists in its more recent ‘fund-based’ guise, and that this parallel cautions against viewing CCPs in an unduly favourable light. That is to say, in much the same way that market-based finance helped to neutralise systemic risk in good or moderately turbulent times pre-crisis, but amplified it in times of acute market turbulence, so too CCPs are liable to exhibit similar tendencies. Finally, although the UK’s new regulatory and supervisory regime applicable to CCPs has much to commend it, these measures are, in fact, likely to be of limited assistance in ensuing that CCPs are able to perform their mutualisation role, or that they do not disrupt financial markets, when things go seriously wrong.

The (impossible) repo trinity: the political economy of repo markets

ABSTRACTIn its capacity as debt issuer, the state has played a growing role in financial life over the last 30 years. To examine this role and connect it to shadow banking, the paper develops the concept of the ‘repo trinity’, which captures a set of policy objectives that central banks outlined after the 1998 Russian crisis, the first systemic crisis of collateral-based finance. The repo trinity connected financial stability with liquid government bond markets and free repo markets. It further reinforced the dominance of the US government bond market as institutional template for states adjusting to a world of independent central banks, market-based financing and global competition for liquidity. Central banks and the Financial Stability Board recognized the impossible nature of the trinity after 2008, attributing cyclical leverage (financial instability) and elusive liquidity in collateral markets to deregulated repo markets, markets systemic to shadow banking. The new approach triggered radical changes in crisis central banking but has not powered significant regulatory interventions in the absence of an alternative mode of organizing government bond markets.

Regional Financial Cooperation of SMEs' Financing in the Asia-Pacific: Lessons from the EU

The recent downturn in the global economy is demanding new growth models from APEC members, and SMEs are expected to play a crucial role in raising productivity and in sustaining economic growth by facilitating technological advances, as well as in job creation. Given that SMEs have generally limited access to finance due to information asymmetries and the riskiness of their businesses, public support by government such as credit guarantee schemes (CGS) are a very important tool for supporting SMEs. SMEs at early stages of development (or start-ups) have risk profiles that favor equity financing or financing through the capital market. For this to work, however, the “law of large numbers” must apply. This method of financing is not appropriate for small markets. Therefore it will work best in a developed equity market such as that of the US. When the conditions above do not hold, two alternatives are possible. The first option is to realize the law of large numbers in an inter-temporal way. This gives rise to the need for a policy lending program (or government credit) resembling a typical European-style policy financing scheme. Second option is to expand the financial market. For this to work, establishing universality of contracts through economic integration is necessary. Universality of contracts mean equal protection of property rights for incoming foreigners who enter into contracts in the host country. In this case, capital inflow is also needed from countries outside the integrated economic bloc. EIB (European Investment Bank) aims to implement the EU’s SME Initiative through its SME support programs. The European Investment Fund is responsible for allocating SME capital to stimulate the SME sector, on behalf of the EC. The experience of the EU points to the necessity of non-bank financing programme to add to bank financing for SMEs. Thus EIF is also shifting its focus from provision of early-stage guarantees to development of various capital market-based instruments for SMEs. This study ends with suggestions for APEC regarding SME financing policies. First, PCGS (public credit guarantee system) is better in the very early stages of financial cooperation. Second, SME financing policy should include both CGS-style and market-based financing. Third, it is necessary to settle on a definition of SMEs based on unified criteria. Fourth, a PCGS-style support scheme is needed to develop within the APEC framework. Lastly, an equity market-based support system specialized for SMEs should be established. This report also suggests action plans to make an Investment fund centered on SMEs.

‘Test Driving’ a Financing Instrument for Climate Adaptation: Analyzing Institutional Dilemmas using Simulation Gaming

Urban physical public infrastructure is a frontline defense mechanism to manage and mitigate climate-related impacts. Market instruments are often cited as possible means to spread risk and reduce financial burdens on the public sector. The authors argue that existing research tends to focus on the technical issues of instruments and neglects considering institutional dynamics that may enable or constrain local market-based financing mechanisms. In this article, three core dilemmas (values uncertainty, planning horizon, and indirect benefits) are used to analyze the responses of practitioners to a possible financing instrument. The findings indicate that the practitioner’s responses to tax increment financing were largely shaped by the adaptation dilemmas and not the characteristics of the instrument per se. By mapping the dilemmas onto whether they would recommend it, participants imposed a financial barrier on climate adaptation investments. The authors conclude that a key imperative in the design of policy instruments is to pay attention to the congruency of informal institutions at the ‘street level’ in order to be in-step with the current sociopolitical conditions. The findings also point to four key attributes that a local market-based instrument would need to be aligned and responsive to the Dutch planning and development context.

Empowering Market-Based Finance: A Note on Bank Bailouts in the Aftermath of the North Atlantic Financial Crisis of 2007

Abstract The North Atlantic Financial Crisis of 2007 did suddenly and massively disrupt the activities of financial markets and financial institutions that were organised under a market-based financial architecture at local and international levels. Both corporate and public policies were at the origin of this financial organisation that was established since the seventies and put at issue by this crisis. Finance and government were then as much complementary as rival actors throughout this market-driven transformation of local and international financial systems. Bank bailouts of 2007–2008 may be situated in this comprehensive and historical pattern, and embedded in the institutional structure that was designed and implemented to organise trans-national financial markets and financialisation.

Opportunities and limitations of public equity markets for SMEs

This article on public equity financing for small and medium-sized enterprises (SMEs) complements earlier OECD work on market-based finance for SMEs. The development of this market segment could promote investment in SMEs and, together with securitisation and other non-bank debt financing instruments, encourage an enhanced allocation of risk and risk taking, and thus support growth. Despite the benefits of public SME equity, its share is small and an equity gap exists for risk financing more generally. A number of important impediments to the wider use of public equities for SMEs are identified, such as admission cost and listing requirements, lack of liquidity, educational gaps, limited ecosystems, and tax treatment, all of which require attention by regulators and policy makers alike.

: Dodd-Frankk (Effects of the Dodd-Frank Act on Bank Financing: Evidence from US Commercial Banks)

Korean Abstract: 본 논문은 2010년 도드-프랭크법(Dodd-Frank Wall Street Reform and Consumer Protection Act)의 도입으로 더욱 높은 퇴출압력에 직면하게 된 미국의 중소형은행들이 자금조달 방식을 변화시키는지를 분석하였다. 2009~2012년 미국 상업은행들에 대한 패널데이터를 구축하여 연구한 결과, 대마불사와 구제금융의 관행을 종식시키고자 도입된 도드-프랭크법의 시행이후 대형은행들보다는 중소형은행들이 더욱 많이 도산하였으며, 자산규모가 작거나 위험이 큰 은행일수록 부보예금 수신금리 및 수신비중이 높음을 발견하였다. 이는 도드-프랭크법 도입 이후 더욱 높은 퇴출압력에 직면하게 된 부실 중소형은행들이, 예금보험제도로 인해 시장규율이 효과적으로 작동하기 어려운 부보예금의 수신금리를 높여 적극적으로 부보예금을 유치하였음을 시사한다. 이러한 결과에 기초하여 본 논문에서는 부실 중소형은행들이 과도하게 높은 예금금리를 제시할 경우 규제 및 감독을 강화할 것을 제안한다. English Abstract: Using a panel dataset for US commercial banks over the period 2009-2012, we investigate whether banks change their financing behavior after the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010(“the Dodd-Frank Act”). The Dodd-Frank Act was introduced to improve financial stability by aiming to end the “too-big-to-fail” practice associated with large banks. Using quarterly financial statements, we find that the Dodd-Frank Act affected banks' financing behaviors. Risky banks pay higher interest rates to depositors after the enactment of the Dodd-Frank Act, as they rely more on deposits and less on market-based financing. Empirical findings in this study suggest that risky banks might offer excessive interest rates on insured deposits. Our study has policy implications, specifically that banking supervisory authorities should intensify their monitoring and supervision of banks' financing behaviors, due to the moral hazard of risky banks.

Analyzing financial structure of Turkish healthcare system in comparison with U.S., German, British, French and Cuban healthcare systems

Financial structure of healthcare systems and the share reserved for healthcare expenses are regarded by countries as very important indicators of economic development. Healthcare expenses are, therefore, among most important agenda items for healthcare policy makers. Finance of healthcare services is still a heated debate item in both public and private sector. Negative economic conditions, fiscal deficits and pressures imposed by international credit institutions all lead to mobilization of private sources for public expenditures and market-based financing model in healthcare sector. All states aim equal access to quality and efficient healthcare services at service delivery phase, irrespective of the method adopted. Healthcare services should be quality and accessible by all citizens in order to realize the “right of healthy life”. Healthcare services should be, therefore, efficiently and effectively financed. Aim of this study is to address and analyze methods used in financing Turkish healthcare services and to compare thereof with financial structures of U.S., U.K., France, Germany and Cuba, which represent distinctive healthcare finance models worldwide. In this end, active applications in Turkey are reviewed by addressing pros and cons of Turkish healthcare finance model in comparison with other systems

A step too far? The European financial transactions tax on shadow banking

ABSTRACTThis paper focuses on the European Commission's proposals to include the repo market – a market systemic to European (shadow) banking – in the financial transactions tax (FTT). It asks why the FTT governments negotiating under the enhanced co-operation procedure quickly removed the repo market from the scope of the FTT. It argues that the European repo market, rather than a shadow market energized by regulatory arbitrage, as it is customary to portray it, grew out of a public–private joint venture before the crisis. Thus, regulators became deeply embedded – through their government bond markets and policy frameworks – in (repo) market-based finance. This convergence in public and private interests creates new trade-offs and ambiguous preferences that allow private finance to successfully mobilize resistance to reform, creating coalitions with public actors such as the European Central Bank.

US bank holding companies: Structure of activities and performance through the cycles

The development of market-based finance has supported a larger involvement of banks in non-banking activities over the last decades. Does diversification beyond “traditional” banking result in actual diversification of earning risks and superior risk-return profile? Existing studies on bank performance address the effect of earnings based on accounting types and for specific time periods. With the exception of proprietary investments and financial leverage, knowledge with regard to underlying activities is scarce and little conclusive to date. Other studies, mainly stemming from central banks, do not focus on activity types or risk-return but evidence a marked influence of economic conditions and financial markets on banks' income.The paper proposes a twofold original contribution by addressing the influence of economic conditions and financial markets on specific activities conducted by banks. Based on granular data from a panel of US Bank Holding Companies (BHC), it first aims at estimating profitabilities related to “traditional” banking services and to (customers) investment services conditional to the environment. The study is then extended by the simulation of multiple scenarios to assess the expected performance of activities (profitability and risk) as well as the extent of uncertainty. Diversification into investment services is found to improve the expected risk-return. Also, well calibrated interest rate mismatch (between assets and liabilities) further supports performance. Deviations from historical volatilities and correlations of influential variables may cause diversification benefits to vary. Results however also suggest that the uncertainty of ROE associated with such diversification is limited compared to banking alone.

Financial sector in resource-dependent economies

This paper examines financial sector characteristics in resource-dependent economies. Using an extensive data set covering 128 countries for the period 1995 to 2009, we present empirical evidence that the banking sector tends to be smaller in resource-dependent economies. Moreover, we locate a low threshold level at which the higher resource-dependence begins to be harmful for domestic banking sector. We also find evidence that the use of market-based financing is more common in resource-dependent economies. Further, our results suggest that a financial sector formed according to the needs of the resource sector might be unfavorable for emerging businesses, thereby hampering economic diversification and reinforcing the resource curse.