Lucia Dalla Pellegrina

Politicians, central banks, and the shape of financial supervision architectures

Purpose - This paper aims to investigate the role of the quality of government on financial supervisory structures in different countries. Design/methodology/approach - The objectives are pursued by means of econometric tools based on probit and multinomial logit techniques. Findings - It is found that the quality of government plays a crucial role in determining supervision unification. “Good” policymakers (helping hand types) prefer a unified financial authority while “bad” ones (grabbing hand type) choose specialized or hybrid models depending on how powerful is the central bank. Research limitations/implications - Research limitations are represented by the endogenous nature of political variables with respect to the supervisory design. Suggestions for future research rely on finding adequate instrumental variables to be included in the empirical analysis in order to address causality issues. Practical implications - The paper follows a positive approach, explaining why different supervisory structures are observed around the world. As a consequence, it does not provide any normative implication. Originality/value - Its original contribution can be identified in the first attempt to include political preferences in determining the choice among different regimes of financial supervision.

The Risk Based Approach in the New European Anti-Money Laundering Legislation: A Law and Economics View

In 2005 the European Commission adopted the Third Directive on Anti-Money Laundering (AML), which was to be implemented into national laws at the latest by December 2007. The key feature that characterizes the Third Directive is the idea that the regulatory framework should be risk-based (RBA). The aim of this regulation is to elicit a high level of outcome in terms of AML effectiveness from self-interested financial institutions (FIs) who hold private information. In this paper we study how to increase the effectiveness of AML rules, using a principal-agent framework to describe the regulatory setting in which an RBA is applied. We focus on incentive problems arising in a three-layer hierarchy, which includes public authorities (policymakers), financial institutions, and supervisors.

Choosing between the Government and the Regions: An Empirical Analysis of the Italian Constitutional Court Decisions

We test the extent to which political variables can explain the behavior of constitutional judges in Italy when dealing with conflicts between the central government and regions. We study two competing hypotheses. One hypothesis argues that we should expect some alignment between the political preferences of the judges and the success of the central government primarily due to the appointment mechanism. Another hypothesis suggests that there should be no systematic alignment between the political preferences of the judges and the success of the central government. Unlike previous literature, our empirical results seem to confirm that when the Rapporteur and the Court’s majority are allegedly affiliated with the Prime Minister’s coalition, the odds of success of the Prime Minister go up.

Court delays and crime deterrence

Using Italian data in the period 1999–2002, we estimate the impact of trial delays on the willingness to commit crimes against property. However, the endogenous relationship that links the former to the latter could generate serious problems of inconsistency in the estimation procedure. Since geographical distance can be considered an exogenous determinant of the probability of belonging to peripheral courts, which are typically considered less efficient than main ones, it should represent a valid candidate instrument for trial delay. Estimates obtained by means of Two-Stage Least Squares show a significant positive effect of trials duration on crimes, supporting the hypothesis that some criminals are either sensitive to the discounting process of punishment or aware of the probability of prescription, or both. As a side result, we also find a relationship between courts’ fragmentation and trial duration. This suggests that an optimal dimension of courts is likely to exist, and that policy makers should take this into consideration in the design of the jurisdictional geography.

Good Bye Light Touch? Macroeconomic Resilience, Banking Regulation and Institutions

With the Great Crisis of 2008-2009 we have witnessed a relevant episode of macroeconomic vulnerability affecting many countries. To what extent such vulnerability has depended upon the design of light touch (LT) banking regulation? And to what extent other institutional factors, different from − as well as complementary to − banking regulation, have contributed to the Great Crisis? The present work offers two contributions: a systematic review of the existing literature on the subject; an empirical analysis conducted on a sample of 102 countries. We observe an Unpleasant Nexus (UN), i.e. that macroeconomic volatility is associated in a robust and systematic way with LT banking regulation. But the UN does not operate in a vacuum. The link between vulnerability and LT banking regulation seems representative of a more general relationship between institutional design and macroeconomic performance. Our analysis shows how various types of institutions – public, political, legal, monetary – also seem to exert an unexpected effect on resilience.

Government, Central Bank and Banking Supervision Reforms: Does Independence Matter?

We empirically investigate whether central bank independence (CBI) and the monetary policy setting can jointly influence the likelihood that policymakers assign banking supervision to central banks. We find that, conditional on the government being a benevolent one, higher central bank operational freedom (economic independence) is associated with a reduced degree of supervisory powers. We motivate this with the possibility that governments fear the risk of a discretionary misuse of monetary tools. However, it turns that having tight monetary policy goals(a specific form of political independence) increases the odds of a central bank involvement in supervision. Our interpretation is that this may represent a commitment device mitigating the risk of central bank discretion in monetizing financial distress. Our study suggests that CBI can be relevant, not only for the alleged beneficial effects on macroeconomic variables, but also in influencing policymakers’ decisions in terms of banking supervision.

Vulnerability to Money Laundering and Crime Deterrence: Evidence from Italy

This paper examines the economys vulnerability to money laundering in a given region. Assuming that criminals are rational investors who take into account risks and returns of both legal and illegal investments, we define vulnerability as a function of well-identified drivers. Proxies of these variables are used to empirically investigate the relationship between the institutional/economic characteristics of Italian provinces and their vulnerability to money laundering in the 2008-2013 period. We focus on the impact of the reporting of suspicious transactions to the Financial Intelligence Unit, by using instrumental variables to address endogeneity in the relationship between the number of reports made and our measure of vulnerability. Results highlight positive effects of the institutional policies adopted to fight money laundering, especially as far as the reporting of suspicious transactions is concerned. Further dimensions of local vulnerability are outlined: time-invariant heterogeneity across provinces, showing that certain areas are more systematically vulnerable because of persistent local features that cannot be individually identified; and idiosyncratic vulnerability, which pinpoints the fact that some provinces have been periodically subject to abnormally intense money-laundering activity.

Group meeting frequency and borrowers’ repayment performance in microfinance: Evidence from a quasi-natural experiment in South Africa

A quasi-natural experiment has been carried out in which the Centre Meeting (CM) rules of some centres of a large Microfinance Institution (MFI) that offers microfinance services, in the form of group lending, were changed. The study has been carried out at the Small Enterprise Foundation (SEF), an MFI that operates in South Africa. The frequency of group meetings, organised as part of the “Monthly Centre Meetings�? pilot programme, was reduced from bimonthly to monthly, and only one member per credit- group was asked to participate instead of all the group members. The purpose of these changes was to allow borrowers to save time to spend on their own economic activities. This new policy was put into force for one year, from May 2014 to the end of April 2015. After selecting a suitable control group of micro- borrowers, using Propensity Score Matching techniques, we ran difference-in-difference (DID) regressions to evaluate the impact of the policy changes on the client’s repayment and saving behaviour. The obtained estimates suggest that the change in the policy rules had led to a deterioration of the customers’ saving balances and had increased delayed repayments. Text mining techniques, applied to survey data, pointed towards a lack of trust within the groups, the members of which did not meet frequently outside the CMs, and this was found to be one of the main causes of failure of the pilot experiment. We have concluded that group meetings are an effective tool to stimulate the accumulation of social capital for some categories of clients, and that those MFIs that wish to implement similar interventions should be aware of the drawbacks pertaining to borrowers’ behaviour.

Access to Credit for Small Innovative Businesses

Using data for a large sample of small firms collected through the 8th UniCredit Survey conducted in 2011, we investigate the extent to which banks of different size reward innovative firms, in terms of both access to lending and volume of credit granted. We find that more innovative firms are associated with weak credit rationing. Using instrumental variable techniques to manage the endogenous nature of innovation, we show that a large bank more strongly supports product innovation, whereas there is no substantial difference in the extent to which small and large banks provide credit to small firms undertaking process innovations.

Can Shareholder Litigation Discipline CEO Bonuses in the Financial Sector? The Role of Securities Class Actions

The dynamics of executive compensation represents a critical issue, especially in the financial industry. There is evidence that even during the recent financial crisis CEOs were rewarded with disproportionate bonuses, a phenomenon that stands in vivid contrast with the wave of securities litigation that took place in that period as a consequence of managerial misbehaviour. This paper empirically investigates the relationship between securities class actions and the growth of CEO bonuses for financial intermediaries included in the S&P500 index in the period 1999-2010. We use an instrumental variable related to court behaviour in order to address problems arising from the endogenous nature of securities class actions with respect to CEO compensation. The analysis shows that the former are likely to moderate the dynamics of the latter, although the effect does not seem to persist through time.