The global financial crisis of the last decade has exposed the vulnerability of banking systems around the world as we witnessed various bank-runs and bail-out efforts from governments. At the backdrop of this historical event,... more
The global financial crisis of the last decade has exposed the vulnerability of banking systems around the world as we witnessed various bank-runs and bail-out efforts from governments. At the backdrop of this historical event, governments around the world were realizing the need for more efficient macro-prudential tools to mitigate the systemic risks inherent in our financial systems. International regulatory bodies like the Basel Committee on banking supervision revised their regulatory frameworks and issued revisions of Basel II as Basel III for the ―regulation, supervision and risk management of the banking sector‖ in the years that followed the financial crisis. Accordingly, countries around the world have been increasingly adopting the regulatory frameworks based on the phase-wise implementation of the Basel III accord. Besides Basel III, Deposit Insurance Schemes have stood out as essential tool for minimizing systemic risks as well as for the overall safety of the financial systems. There has been a broad consensus on relying on the ex-ante deposit insurance fund with risk-based pricing of premiums for such a safety net. China is the latest country to join the herd of countries introducing such a deposit insurance scheme consisting of a mandatory flat rate and a risk-based component. By the time of writing this dissertation, Chinese regulatory bodies have already launched their version of the deposit insurance in May 2015. Apparently it is important to study an appropriate valuation of the deposit insurance premiums for Chinese banks while China is making this historical endeavor. Therefore, this paper uses an alternative methodology of option pricing model introduced by Walter and Schaller (2011) to calculate the risk-based premiums as well as the corresponding fund size for Chinese banks. This model is based on the open Black Scholes formula modified by Merton (1977). It is a single indicator model as applied in Walter (2011) that uses Tier1 ratio specified in the Basel framework as a proxy for measuring specific risk of an individual bank. The put values for each year for each bank are determined by simulating the Tier 1 ratios using Monte-Carlo simulation process based on Ornstein-Uhlenbeck-Vasicek model, which incorporates mean-reversion. Subsequently the premiums and total insurance fund for the sample period are determined using the specific risk factor and the total customer deposits as the size factor. The minimum capital ratio of 12%, which was used by Walter & Schaller (2011) and Walter (2011) as state-of-the-art trigger of default, results in a very large amount of deposit insurance fund for China, which we believe is not appropriate. Thus we followed CBRC‘s regulatory framework based on Basel III and use 10.5% as the minimum capital ratio which will be used as a trigger. We found that using 12% as trigger the total accumulated deposit insurance fund for six years to be 55.26 trillion RMB whereas while using 10.5% as expected a lower amount of 20.028 trillion RMB. The average specific risk factor is found to be 7.63% while the average percentage share of premiums in terms of total deposits is 7.33%. Therefore, we conclude that if only flat-rate premiums are to be levied to the Chinese banks, it should be around 7.33% of their total customer deposits. This rate is as expected higher than world standards and significantly higher than the flat-rate suggested by Chinese regulatory bodies. We also conclude that the average rate after adding the flat rate and risk-based components should be around 7.33% for the Chinese banking industry.
Asymmetric information is one of the most important issues faced by the public institutions due to its consequences. In this context, the role of internal control in reduction of asymmetric information will be presented in this study. Due... more
Asymmetric information is one of the most important issues faced by the public institutions due to its consequences. In this context, the role of internal control in reduction of asymmetric information will be presented in this study. Due to asymmetric information between principle and agency, moral hazard problems are often experienced. Internal control has a key role in mitigating such problems. Behaviors inappropriate for the institutional object can be reduced to the lowest level and the usage of resources in an efficient and effective manner is provided by internal control. In this framework, the moral hazard problem will be examined and the contribution of internal control mechanisms to mitigating this problems will be evaulated in the public sector.
We develop a model in which a single currency plays the role of medium of exchange in two countries, while their governments are free to determine their fiscal balance and the extent to which they need to extract seigniorage from the... more
We develop a model in which a single currency plays the role of medium of exchange in two countries, while their governments are free to determine their fiscal balance and the extent to which they need to extract seigniorage from the common currency. We show that the actions of each government affect the economic performance of the other country, due to their trade relationship and, mostly, due to their monetary integration. We then endogenize each government’s fiscal policy, and find that in equilibrium they will choose higher deficits than if they did not share a currency. Moreover, their policy choices are inefficient in the sense that if they could negotiate and commit their fiscal policy, they would choose smaller deficits. The inefficiency is worst if one of the partners is very small, or very unproductive, relative to the other, as the moral hazard on the smaller or poorer government would be larger
