Financial institutions and markets [学习笔记]

Financial institutions and markets in developing countries

我们要先了解什么是Adverse Selection and Moral Hazard。

在微观经济学中，我们讨论的完全竞争模型有一个非常重要的前提，那就是假设信息的完全性，即市场的供求双方对于所交换的商品都具有充分的信息了解。比如说，消费者知道自己的偏好，了解在什么地方，什么时候存在有何种质量的以怎样的价格出售的商品；生产者则明白自己的生产情况，了解在什么地方，什么时候存在有何种质量的以怎样的价格出售的生产要素；等等。

然而，非常显而易见的是，有关信息完全性的假设是不符合现实的。在现实经济中，信息往往是不完全的，或者我们可以说是不对称的。在这里，信息不对称不仅是绝对意义上的不对称，即由于认知能力的有限，人们不可能知道在任何时候，任何地方发生的或没有发生却即将发生的任何情况；而且信息不对称也指相对意义上的不对称，其市场经济本身不能够生产出足够的信息并有效地进行配置。

信息并不同于普通的商品。人们在购买普通商品时，首先会了解它的价值，然后决定是否购买；但是对于信息商品，购买时却很难对其价值做到完全的了解。人们之所以愿意花钱去购买信息商品，是因为还不知道这个商品是什么，一旦知道了商品，也就是知道了信息的内容，就没有人还愿意为此进行支付了。这种情况下，就出现了一个难题：究竟卖者让不让买者在购买之前就充分了解要购买的信息的价值呢？让，购买者可能就会因为知道了信息而不再去购买；不让，购买者也可能因为不知道值不值得买而不去购买。这时，若想买卖成功，就只能依靠双方并不十分可靠的依赖：卖者让买者充分了解信息的用处，买者则答应了解信息的用处后会购买它。可以看出来，市场的作用受到了很大的。

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信息不对称就是在市场交易中，当市场的一方无法观测和监督另一方的行为或无法获知另一方行动的完全信息，亦或观测和监督成本高昂时，交易双方掌握的信息所处的不对称状态。

在自由市场经济中，发生信息不对称往往会导致两个结果——逆向选择和道德风险。

逆向选择。又称为不利选择，是指掌握信息较多的一方利用相对方对信息的无知而隐瞒相关信息，获取额外利益，客观上导致不合理的市场分配的行为。就一般商品市场而言，普遍存在信息不对称现象，最常见的是有关商品质量信息的不对称。卖者拥有商品质量的真实信息，但为了自身利益的最大化，可能会有隐藏这些信息的动机。买者依据平均质量的价格购买，则那些因成本高而造成高价的优质产品反而会失去市场，市场逐渐被劣质产品所充斥。由于逆向选择的存在，优质产品被排挤，此种市场的运行是无效率的，达不到资源的优化配置，阻碍了市场基本经济功能的发挥，摧毁了消费者对市场的信任，严重的会导致市场的萎缩和交易的停顿。

道德风险，是指占有信息优势的一方为自身利益而故意隐藏相关信息，对另一方造成损害的行为。道德风险的存在增加了交易的风险性和交易的成本，导致委托人在交易完成后要对代理人行为投入一定的监管成本以获取相关信息，事前对这种成本的估计不足有可能抑制交易行为的发生，使信息的不对称分布产生的道德风险导致市场的低效运行。

以上是我在本科毕业论文中谈到的不完全信息，有助于理解什么是不完全信息以及逆向选择与道德风险，当然对本次考试没多大用，只是有助于理解。 “Typically the asymmetric information is the seller that knows more about the product than the buyer, however, it is possible for the reverse to be true: for the

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buyer to know more than the seller” (Molho,1997).

As Molho said, adverse selection is that in a situation where sellers know more relative information but buyers do not know (or vice versa) about some aspects of products qualities (Molho, 1997). This is the problem created by asymmetric information before the transaction occurs.

McClure, B.(2003) maintained that:” Moral hazard is the risk that a party to a transaction has not entered into the contract in good faith, has provided misleading information about its assets, liabilities or credit capacity, or has an incentive to take unusual risks in a desperate attempt to earn a profit before the contract settles”. Moral hazard is the consequence of asymmetric information after the transaction occurs.

Molho, I. (1997) The economics of Information: Lying and Cheating in markets and organisations, Oxford: Blackwell, pp117-135

McClure, B. (2003) Show and Tell: The Importance of Transparency (http://www.investopedia.com), accessed 22/08/05

以上是我在EFL学习是最后的Block B论文，有一些关于不完全信息以及逆向选择和道德风险的英文解释，并附有Reference，也是有助于理解，但是大家可以摘取部分定义以完善答题。 证券股票市场在金融机构里一直很薄弱就是因为逆向选择与道德风险的问题，其中最

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重要的是搭顺风车的问题，事实上只有一些大型的公司才有实力去发行股票。银行则一直可以很好地解决逆向选择问题和道德风险问题，所以一直在金融体系中扮演一个很重要的角色。

Banks have particular advantages over other financial intermediaries in solving asymmetric information problems. For example, banks' advantages in information collection activities are enhanced by their ability to engage in long-term customer relationships and issue loans using lines of credit arrangements. In addition their ability to scrutinize the checking account balances of their borrowers provides them with an additional advantage in monitoring the borrowers behavior. Banks also have advantages in reducing moral hazard because, as demonstrated by Diamond (1984), they can engage in lower cost monitoring than individuals, and because, as pointed out by Stiglitz and Weiss (1983), they have advantages in preventing risk taking by borrowers since they can use the threat of cutting off lending in the future to improve borrower's behavior. Banks' natural advantages in collecting information and reducing moral hazard explain why banks have such an important role in financial markets in the developed countries. Furthermore, the greater difficulty of acquiring information on private firms in developing countries makes banks even more important in the financial systems of these countries.

Diamond, D. (1984), \"Financial Intermediation and Delegated Monitoring\Review of Economic Studies, Vol. 51, pp. 3 9 3 – 414

Stiglitz, J.E., and Weiss, A. (1983). \"Incentive Effects of Terminations: Applications to Credit and Labor markets,\" American Economic Review, Vol. 73, pp.

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912-27.

Asymmetric information leads to adverse selection and moral hazard problems that have an important impact on the structure of the financial system, this analysis is very useful in understanding the common forms that bank regulation and supervision take in most countries in the world, which include: a safety net for depositors, restrictions on bank asset holdings, capital requirements, disclosure requirements, chartering, bank examinations, and prompt corrective action.

Government safety net

A government safety net for depositors can short circuit runs on banks and bank panics. Deposit insurance is one form of the safety net in which depositors, sometimes with a limit to amount and sometimes not, is insured against losses due to a bank failure. With fully insured deposits, depositors don't need to run to the bank to make withdrawals -- even if they are worried about the bank's health -- because their deposits will be worth 100 cents on the dollar no matter what. Even with less than full insurance, the incentive for depositors to run to withdraw deposits when they are unsure about the bank's health is decreased.

Although a government safety net can be quite successful at protecting depositors and preventing bank panics, it is a mixed blessing. The most serious drawback of a safety net stems from moral hazard; an important feature of insurance arrangements in general because the existence of insurance provides

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increased incentives for taking risks that might result in an insurance payoff. Moral hazard is a prominent attribute in government arrangements to provide a safety net because depositors expect that they will not suffer losses if a bank fails. Thus they may not impose the discipline of the marketplace on banks by withdrawing deposits when they suspect that the bank is taking on too much risk. Consequently, banks that are provided with a safety net can (and do) take on greater risks than they otherwise would.

A further problem when there is a safety net arises because of adverse selection, where the people who are most likely to produce the adverse outcome insured against (e.g., bank failure) are those who most want to take advantage of the insurance. Because depositors have little reason to impose discipline on the bank if they know it is subject to a safety net, risk-loving entrepreneurs find the banking industry a particularly attractive one to enter---they know they will be able to engage in highly risky activities. Even worse, because depositors have so little reason to monitor the bank's activities if it has a safety net, outright crooks may also find banking an attractive industry for their activities, because it is easy for them to get away with fraud and the embezzlement of funds.

Restrictions on asset holdings and bank capital requirements

Even in the absence of a government safety net, banks still have the moral hazard incentive to take on too much risk. Risky assets may provide the bank with higher earnings when they pay off; but if they do not pay off and the bank fails, the depositor is left holding the bag. If depositors were able to easily monitor the bank

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by acquiring information on its risk-taking activities, they would immediately withdraw their deposits if the bank were taking on too much risk. Then to prevent such a loss of deposits, the bank would be more likely to reduce its risk-taking activities. Bank regulations that restrict banks from holding risky assets such as common stock are a direct means of making banks avoid too much risk. Bank regulations also promote diversification, which reduces risk by limiting the amount of loans in particular categories or to individual borrowers. Requirements that banks have sufficient bank capital are another way to change the bank's incentives to take on less risk. When a bank is forced to have a large amount of equity capital, it has more to lose if it fails and is thus less likely to engage in moral hazard and will pursue less risky activities. Another way of stating the purpose of capital requirements is that they help to align the banks' incentives more with those of the regulator. In addition, capital requirements can be tied to the amount of risk taking the bank is pursuing, as with the Basle agreements, in effect charging the bank a higher insurance premium when it takes on more risk, thereby discouraging risk taking.

Chartering and Examination

Chartering of banks is one method for preventing this adverse selection problem; through chartering, proposals for new banks are screened to prevent undesirable people from controlling them. Regular bank examinations, which allow regulators to monitor whether the bank is complying with capital requirements and restrictions on asset holdings, also function to limit moral hazard. In addition, bank examiners can assess whether the bank has the proper

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management controls in place to prevent fraud or excessive risk taking. Actions taken by examiners to reduce moral hazard by preventing banks from taking on too much risk further help to reduce the adverse selection problem because, with less of an opportunity for risk-taking, risk-loving entrepreneurs will be less likely to be attracted to the banking industry.

Disclosure Requirements

In order to ensure that there is better information for depositors and the marketplace, regulators can require that banks adhere to certain standard accounting principles and disclose a wide range of information that helps the market assess the quality of a bank's portfolio and the amount of the bank's exposure to risk. More public information about the risks incurred by banks and the quality of their portfolio can better enable stockholders, creditors and depositors to evaluate and monitor banks, and so act as a deterrent to excessive risk-taking.

Prompt Corrective Action

Bank regulation can reduce moral hazard and adverse selection problems in the banking system only if regulators pursue prompt corrective action if banks are not complying with the regulatory requirements. This means that bank supervisors must enforce regulations in a consistent fashion and must not pursue regulatory forbearance, that is, allow banks to keep on operating as usual despite noncompliance with regulations because it is hoped that the bank's problem will

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go away with time.

Why the Regulatory Process Might Not Work as Intended (in practice)?

In order to act in the public interest and lower costs to the deposit insurance agency, we have seen that regulators have several tasks. They must set tight restrictions on holding assets that are too risky, must impose adequate capital requirements, and must not engage in regulatory forbearance, particularly that which allows insolvent institutions to continue to operate. However, this is not what always occurs in practice.

There are two reasons why the regulatory process might not work as intended. The first is that regulators and bank managers may not have sufficient resources or knowledge to do their job properly. An example of this occurred in the United States and helped lead a regulatory breakdown in the savings and loan (S&L) industry in the 1980s. One aspect of the deregulation wave of the early 1980s was the passage of legislation in 1980 and 1982 that deregulated the S&L industry and opened up many lines of business for these institutions. These thrift institutions, which had been restricted almost entirely to making loans for home mortgages, now were allowed to have up to 40% of their assets in commercial real estate loans, up to 30% in consumer lending, and up to 10% in commercial loans and leases. In the wake of this legislation, savings and loans regulators allowed up to 10% of assets to be in junk bonds or in direct investments (common stocks, real estate, service corporations, and operating subsidiaries). Three problems arose from 9

these expanded powers for S&Ls. First many S&L managers did not have the required expertise to manage risk appropriately in these new lines of business. Second, the new powers meant that there was a rapid growth in new lending, particularly to the real estate sector. Even if the required expertise was available initially, rapid credit growth may outstrip the available information resources of the banking institution, resulting in excessive risk taking. Third, these new powers of the S&Ls and lending boom meant that their activities were expanding in scope and were becoming more complicated, requiring an expansion of regulatory resources to appropriately monitor these activities. Unfortunately, regulators of the S&Ls at the Federal Savings and Loan Insurance Corporation (FSLIC) neither had the expertise nor were provided with additional resources which would have enabled them to sufficiently monitor these new activities. Given the lack of expertise in both the S&L industry and the weakening of the regulatory apparatus, it is no surprise that S&Ls took on excessive risks, which helped lead to massive losses to the American taxpayer. The scenario described above in the United States was not unique and has occurred in other developed countries. A striking example occurred in the Nordic countries -- Norway, Sweden and Finland -- when they deregulated their financial markets in the early 1980s.9 The lack of expertise in both the banking industry and its regulators to keep risk taking in check, particularly when bank credit growth was very high as a result of a lending boom, resulted in massive losses to banks loan portfolios when real estate prices collapsed in the late 1980s. The result was a government bailout of the banking industry in those countries which was similar in scale relative to GDP to that which occurred in the United States. The Japanese banking crisis that has been unfolding in recent years, also shares common elements with the episode in the Nordic 10

countries. Deregulation of the financial system in Japan in the 1980s was followed by increased Japanese bank lending, especially to the real estate sector, which resulted in huge loan losses when the real estate sector collapsed. (这是一段具体的

例子，大家读一下，助于理解，不必背，但是也可换成自己的话来助于答题)

The second reason why regulators may not do their job properly is explained by understanding that the relationship between voters-taxpayers and the regulators and politicians creates a particular type of moral hazard problem, the principal-agent problem. Regulators and politicians are ultimately agents for voters-taxpayers (principals) because in the final analysis taxpayers bear the cost of any losses when the safety net is invoked. The principal-agent problem occurs because the agent (a politician or regulator) may not have the same incentives to minimize costs to the economy as the principal (the taxpayer). Indeed, the principal-agent problem stems from asymmetric information because the principal does not have sufficient information about what the agent is doing to make sure that the agent is operating in the principal's interest.

A classic example of this principal-agent problem occurred in the United States during the savings and loan debacle of the 1980s. By the late 1970s, many savings and loans in the United States were actually insolvent because most of their assets were tied up in fixed-rate long-term mortgages whose rates had been fixed at a time when interest rates were quite low. When interest rates rose in the 1970s and early 1980s, the cost of funds for these institutions rose dramatically, while their fixed-rate mortgages did not produce higher income. The result was that the economic net worth of the S&Ls plunged dramatically. In addition, the 11

1981-1982 recession and the collapse in the prices of energy and farm products hit the economies of certain parts of the country such as Texas very hard, with the result that there were defaults on many S&Ls' loans. Losses for savings and loan institutions mounted to $10 billion in 1981-- 1982, and by some estimates over half of the S&Ls in the United States had a negative net worth and were thus insolvent by the end of 1982. As our analysis earlier indicates, the incentives to engage in risk-taking moral hazard increased dramatically for these insolvent institutions because they now had little to lose and a lot to gain by taking on excessive risks. Clearly, it was essential that prompt corrective action be enforced and these institutions be closed down. Instead, S&L regulators loosened capital requirements and restrictions on risky asset holdings and pursued regulatory forbearance. One important incentive for regulators that explains this phenomenon is their desire to escape blame for poor performance by their agency. By loosening capital requirements and pursuing regulatory forbearance, regulators hide the problem of an insolvent bank and hope that the situation will improve. Such behavior on the part of regulators is described by Edward Kane of Ohio State University as \"bureaucratic gambling.\" Another important incentive for regulators is that they want to protect their careers by acceding to pressures from the people who most influence their careers. These people are not the taxpayers but the politicians who try to keep regulators from imposing tough regulations on institutions that are major campaign contributors. Members of Congress have often lobbied regulators to ease up on a 12

particular S&L that contributed large sums to their campaigns. In addition, both the U.S. Congress and the presidential administration promoted banking legislation in 1980 and 1982 that made it easier for savings and loans to engage in risk-taking activities. After the legislation passed, the need for monitoring the S&L industry increased because of the expansion of permissible activities. The S&L regulatory agencies needed more resources to carry out their monitoring activities properly, but Congress (successfully lobbied by the S&L industry) was unwilling to allocate the necessary funds. As a result, the S&L regulatory agencies became so short on personnel that they actually had to cut back on their on-site examinations, just when they were most needed. In the period from January 1984 until July 1986, for example, several hundred S&Ls were not even examined once. Even worse, spurred on by the intense lobbying efforts of the S&L industry, Congress was only willing to pass legislation in 1987 (the Competitive Banking Equality Act) which provided a totally inadequate amount ($15 billion) to close down the insolvent S&Ls. Only when the crisis had reached massive proportions requiring a bailout on the order of $150 billion in present value terms did Congress pass in 1991 the Federal Deposit Insurance Corporation Act (FDICIA) which provided the necessary funds to clean up the S&L mess and which tightened up the bank regulatory process.（同上，只是例子，不用背，没时间

不看也行）

Institutional features of the financial systems in developing countries imply that it may be far more difficult for the central bank to promote recovery from a financial crisis. As mentioned before, many developing countries have much of

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their debt denominated in foreign currency. Furthermore, their past record of high and variable inflation has resulted in debt contracts of very short duration and expansionary monetary is likely to cause expected inflation to rise dramatically. (最后这里提了一点发展中国家，我觉得还挺重要的，看一下吧！)

Mishkin, F., 1997, Understanding financial crises: A developing country perspective

（以下的部分主要讨论了银行监管的脆弱性，大家可以看一下是否有必要挑出来放在回答‘在现实中银行监管不能很有效地解决道德风险和逆向选择’）

Analyses of recent financial crises, in both developed and less-developed countries indicate that ‘regulatory failures’ are not exclusively (or even mainly) a problem that the rules were wrong. Five common characteristics have been weak internal risk analysis, management and control systems within banks; inadequate official supervision, weak (or even perverse) incentives within the financial system generally and financial institutions in particular; inadequate information disclosure, and inadequate corporate governance arrangements both within banks and their large corporate customers. Instability in the macro economy has, therefore, been only part of the explanation fro banking crises.

About adverse incentive structures, a central role of regulation is to create incentives for managers and shareholders to behave in a way consistent with the objectives that are set for regulation when these may not always be in the immediate interests of either managers or owners of banks.

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Reviewing the experience of bank crises in various countries, Demirguc-Kunt and Datragiache (1998) argue on the basis of their sample of countries: ‘Our evidence suggests that, in the period under consideration, moral hazard played a significant role in bringing about systemic banking problems, perhaps because countries with deposit insurance schemes were not generally successful at implementing appropriate prudential regulation and supervision, or because the deposit insurance schemes were not properly designed.’

In all crisis countries, banks have been regulated and supervised and, in principle, most countries nominally adopted standard international norms of regulation. However, the ad option of such standards was often weak and uncertain. There are many elements of weak regulation in the origin of banking crises in recent years and which aggravated the effect of other dimensions of distress:

 Capital adequacy regulations were often either not fully in place or were not effectively enforced.

 Regulator y requirements for capital, while nominally conforming to the letter of international agreements, were nevertheless set too low in relation to the nature of the risks in the economy and the risks being incur red by banks. Capital adequacy regulation often did not accurately reflect banks’ risk characteristics (BIS, 1998).

 Rules with respect to classification of loan quality and provisions were often

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too lenient and ill-specified, with the result that provisions were insufficient to cover expected losses, and earnings and capital were overstated (Brownbridge and Kirkp atrick, 1999; Folker ts-Landau et al., 1995).

 Rules with respect to exposure to single borrowers were often too lax (or not enforced).

 Regulation and super vision with respect to concentrated exposures (e.g. property) were often too lenient.

 Poor accounting standards enabled banks to evade prudential and other restrictions on insider lending (Rahman, 1998).

 Many governments and regulator y authorities were slow and hesitant to act in the face of impending solvency problems of banks. Such regulatory forbearance was often due to regulatory authorities having substantial discretion as to when and whether to intervene, and often being subject to political pres sure of one kind or another.

These amounts to a conclusion that, in many crisis countries, regulatory requirements often did not meet internationally agreed minimum standards (such as the Basel capital adequacy standards) but also in many cases that regulation had not been effectively enforced.

Weak monitoring and supervision

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Because of the nature of financial contracts between financial firms and their customers, continuous monitoring of the behavior of financial firms is needed. The question is who is to under take the necessary monitoring: customers, shareholders, rating agencies, etc. In practice, there can be only a limited monitoring role for retail depositor s due to major information asymmetries which cannot easily be rectified, and because depositor s face the less costly option of withdrawal of deposits. Saunders and Wilson (1996) review the empirical evidence on the role of informed depositors. The funding structure of banks may also militate against effective monitoring in that, unlike with non-financial companies, creditor s tend to be numerous with a small s take for each.

As most (especially retail) customers cannot in practice under take monitoring, and in the presence of deposit insurance they may have no incentive to do so, an important role of regulator y agencies is to monitor the behavior of banks on behalf of consumers. In effect, consumers delegate the task of monitoring to a regulator y agency. There are strong efficiency reasons for consumer s to delegate monitoring and super vision to a specialist agency to act on their behalf as the transactions costs for the consumer are lowered by such delegation (Llewellyn, 1999). However, this is not to argue that a regulator y agency should become a monopolist monitor and super visor of financial firms.

In practice, ‘come form of super visor y failure was a factor in almost all the sample countries’ (Lindgren et al., 1996). In many countries supervisory agencies did not enforce compliance with regulations (Reisen, 1998). In Korea and Indonesia in particular, banks did not comply with regulator y capital adequacy requirements

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or other regulations (UNCTAD, 1998). In particular, connected lending restrictions were not adequately supervised partly because of political pres sure and the lack of transparency in the accounts of banks and their corporate customers.

There has often been a lack of political will on the par t of supervisory agencies to exercise strong supervision. This may b e associated with adverse incentive structures faced by politicians and others who may gain from imprudent banking (Fink and Haiss, 2000). While prudent banking is a public good, hazardous behavior can be beneficial to some s take-holders. Others have noted the lack of political will to exercise strong super vision in the transitional economies of Eastern Europe (Baer and Gray, 1996).

A further dimension to super visor y failure was that supervisory intensity was often not adjusted in line with liberalization in financial systems and the new business operations and risk characteristics of banks that emerged in a more deregulated market environment. This is discussed in more detail in the next section. This was also the case with Scandinavian countries when, in the second half the 1980s, banks responded aggressively to deregulation. The nature and intensity of official supervision needs to reflect the nature of the regulator y environment. In practice, while the latter changed this was often not accompanied by sufficiently intensified super vision.

Llewellyn, D., 2002, An analysis of the causes of recent banking crises, European Journal of Finance, 8: 152-175 18