Incentive-Based Lending Capacity, Competition and Regulation in Banking

Abstract

This paper studies moral hazard in banking due to delegated monitoring in an environment of aggregate risk and examines its implications for credit market equilibrium and regulation, in a model where banks are price competitors for loans and deposits. It provides a rationale for an incentive-based lending capacity positively linked to the bank's capital and pro…t margin, for an oligopolistic market structure wherever banks have market power, and for capital requirements. Social-welfare-maximizing capital requirements are lowered in recessions, are higher the more fragmented the banking sector, and are increased when anti-competitive measures are removed. In equilibrium banks earn excessive pro…ts and credit may be rationed.

An analysis of the effects of the severance payment reform on credit to Italian SMEs

“…The idea that workers in firms with 50+ employees chose pension funds more often than workers in smaller ones is confirmed by Covip data on the participation to occupational funds: the membership rate of private sector employees is 12% in firms with less than 50 workers and 42% in medium-large ones (Covip, 2008a). In order to get an insight on the outflows of TFR from Italian SMEs, we first focus on the forecasts of the total yearly TFR, which represent the (maximum) total amount of money that can be diverted from firms due to the reform 16 .…”

“…The reform caused TFR flows amounting to 3.2 billion euro to be invested in pension funds during 2007, which is 1.5 billion more than in (Covip, 2008a. About 30% of private sector employees were members of a pension fund in 2007, compared to about 25 % in 2006 (Covip, 2008b).…”

“…The reform caused TFR flows amounting to 3.2 billion euro to be invested in pension funds during 2007, which is 1.5 billion more than in (Covip, 2008a. About 30% of private sector employees were members of a pension fund in 2007, compared to about 25 % in 2006 (Covip, 2008b). A broader view on the reform is provided by an ad hoc survey carried out by Eurisko for Anima Research Lab on more than 1,000 private sector employees who were asked how they allocated their TFR flows (the data are described in greater detail in Boeri and Zingales, 2008).…”

“…First, Covip (2008a) reports that the amount of TFR flows conveyed in pension funds in 2007 was equal to 3.2 billion euro. The fact the we obtain a slightly higher value might be because some workers are allowed to invest in pension funds only a fraction of their TFR.…”

Random monitoring in financing relationships

“…The …rst period is a probation period in which the investor estimates the entrepreneur's eligibility for a long-term relationship …nancing. 10 The second period is the time after probation.…”