Finance: Research, Policy and Anecdotes

Everybody talks about fintech, but there are few academic papers on the topic.  Thomas Philippon just came out with an interesting paper (The FinTech Opportunity), that discusses the emergence of new challengers in finance and their possible effects on stability and access. He first documents that the costs of financial service provision have been surprisingly stable, which can explain the entry of new non-bank challengers.  Prudential regulation, however, is focused on incumbents and the political economy makes it unlikely that existing regulatory framework will allow maximising the benefits of this additional competition. Thomas ends with some regulatory principles that aim at not only ensuring stability but also bringing about structural change in the finance industry. 

The revolving door between regulators and bankers has made it back into the headlines recently, with a Deutsche Bank whistleblower turning down his share of the SEC award and pointing the finger at a broken system that allows officials to rotate between regulatory agencies and private financial institutions. But is this revolving door always bad?  A recently accepted paper at the Review of Finance Revolving Doors for Financial Regulators (Sophie Shive and Margaret Foster) gauges the motivations and effects of financial firms’ hiring of former US financial regulatory employees.  The authors show that in the quarter after the hire of a former regulator, market and balance sheet measures of firm risk decrease significantly and measures of risk management activity increase, especially for hires from prudential regulators, who directly monitor financial firm risk. The authors also find that that firms hire ex-employees of their regulators when they perceive a need to reduce risk, consistent with a schooling hypothesis. On the other hand, there seems little direct evidence of quid pro quo behavior, such as decreased regulatory activity or lower fines in the two years before and after the hire of an ex-regulator.

Do improvements in communication technology make geographic distance less relevant? Barry Eichengreen, Arnaud Mehl and Romain Lagarguette argue no, at least for the case of foreign exchange markets (Cables, Sharks and Servers).  They identify exogenous technological changes by the connection of countries to submarine fiberoptic cables used for electronic trading, but which were not laid for purposes related to the foreign exchange market. Making trading more efficient has two off-setting effects on on- vs. off-shore trading, reducing fixed costs of trading on-shore while reducing the importance of distance. The latter effects dominates, boosting the trading share in financial centres, such as London.   Ultimately, the world does not become flatter, but more like described in Flash Boys by Michael Lewis, where everyone competes to be as close to the trading centre as possible. Maybe some relief for the City of London after Brexit. 

21. Aug, 2016