Equilibrium and competition in the banking sector Literature review

Equilibrium and competition in the banking sector - Literature review Example Literature speaks of limited equilibrium modelling. General equilibrium, according to researchers depends on various market conditions. Further, level of equilibrium in banking industry depends on competition and financial stability, which depends further on banks’ risk-taking initiatives. Literature review discusses the opinions of various authors on the banking products as trade off between competition and financial stability on different risk choices. Various risk-transferring models are discussed. Role played by bank supervising technologies forms part of various models. New models of bank risk-taking, named partial equilibrium models are analysed. The UK banking sector is statistically reviewed through the Panzar and Rosse model. Literature review attempts various views on banking competition and financial weaknesses through various models to know if any relationship between equilibrium and competition can be established or not. Past Research As stated by Allen and Gale (2004a), the relationship between banking competition and financial health has been majorly discussed in the discourse of limited equilibrium modelling. There are not many general equilibrium models in literature. ... Banking sector can be stated in partial equilibrium if the exchange between competition and financial stability is generally achieved via a standard risk transferring statement practiced on a bank that arranges funds from insured customers and selects the risk of its investment. In such a scenario where market indicates limited liability, sudden risk alternatives, risk-free deposit demand, and stable return to scale in checking, a high in deposit market competition heightens the deposit rate, decreases banks’ anticipated margins and inspires banks to take advances in risk-taking. This conclusion has been derived by Allen and Gale (2000) in both fixed and ordinarily changing scenarios. A number of scholars in literature have supported this predictability in their works, including Keeley (1990), Matutes and Vives (1996), Hellmann, Murdock and Stiglitz (2000), Cordella and Levi-Yeyati (2002), Repullo (2004) among many others. Nevertheless, in the case of competition among banks i n loan and deposit markets, it is loan rate that governs the degree of risk-transfer initiated by companies, as stated by Stiglitz and Weiss (1981). Boyd and De Nicolo (2005) discussed the evaporating trade-off between competition and financial stability when various risk alternatives are analysed by firms. A rise in loan market competition cuts down bank loan rates, strengthening firms’ anticipated profits and prompting them to select secure investments, which gets written into securer bank loan portfolios. Amidst this increasingly conflicted environment, the risk-transferring statement is used on two market units, firms and banks, in stead of a single entity. Latest versions of this kind of model, including bank heterogeneity (De Nicolo and Loukoianova, 2007),

Reserch Disaster Bonds (also known as CAT bonds or catastrophe bonds) Research Paper

Reserch Disaster Bonds (also known as CAT bonds or catastrophe bonds) - Research Paper Example lves risk taking; investors acquire disaster bonds for a principal and then enjoy the high rate interest accumulation as long as the disaster does not occur. According to leading experts in risk management, â€Å"Catastrophe bonds are fixed income securities, typically issues by insurance companies, which pay an attractive yield to investors, but with a provision that should a specific predetermined event†¦..occur, bondholders suffer the loss of their income and potentially all their capital† (197). Events may be due to natural damage or human induced disasters where the bond may cover either the whole or part of the damage preventing the buyer from reaching to unbalanced sheet. The risk is conveyed to the investors rather than the insurers. The structure of CAT bonds is expressed in CAT bonds demystified (See fig. 1). These bonds are now used widely as they may forego interest and principle either in part or whole as stated in the condition. They require investors’ specialized knowledge and skills in judgment of where to invest. However, the jurisdiction of application affects the disaster bonds effect on parties involved. In the above structure, SPV or SPE are the established entities that insurance companies forward the reinsurance agreement to, which then relay’s the default provisions, as reflected in the agreement as a note; if the terms are approved, transactions are managed to generate money market returns where the SPV or SPE transfer back the principal and accumulated interests in cases of minimal risk involved (â€Å"CAT Bonds Demystified,† Rsm). The disaster bonds act like financial instruments; they were first issued in mid 1990s and most specific in 1997 in American history. American continent has had numerous attacks, U.S blizzard and tornadoes in 1993, Northridge earthquake in 1994 and especially the numerous hurricanes in Mexico, U.S, Caribbean, and Bahamas among others. Japan has also had its difficulty during the 1995 Hanshin earthquake