Blockchain Papers

F. E. Guerra-Pujol

What is the legal status of a “bitcoin,” a decentralized peer-to-peer digital currency? Is the use of bitcoins even legal? Should it be? The bitcoin cybercurrency thus poses a puzzle. Unlike centralized and publicly-created metallic or paper currencies, bitcoin is a privately-created, decentralized medium of exchange and thus is not backed by any national or transnational government or by any public or private bank. As such, the legal status of the bitcoin cybercurrency is murky and unclear at best. Despite this legal uncertainty, the demand for bitcoins on the Internet continues to grow. The authors will present a legal, normative, and game-theoretic analysis of the bitcoin cybercurrency. To provide a theoretical background to our legal and normative analysis, the first part of the paper will present an analytical model of the behavior of bitcoin users. In summary, the use of bitcoins can be modeled as a Prisoner’s Dilemma. That is, because of the limited supply of bitcoins and the rising demand of this cybercurrency, the temptation to defect by hoarding this currency -- rather than using bitcoins for the exchange of goods and services -- threatens the stability of the bitcoin cybercurrency as a whole. In the second part of the paper, the authors consider the legal status of bitcoins, discuss the policy and normative arguments for and against the legalization of bitcoins, and propose several possible legal frameworks for protecting the bitcoin cybercurrency and solving the bitcoin puzzle.

Steven L. Schwarcz

No abstract is available for this record.

Simon Cornée

No abstract is available for this record.

George Drymiotes, KONDURU SIVARAMAKRISHNAN

Recent work in the corporate governance literature stresses the need to provide boards of directors (BoDs) with explicit incentives to safeguard shareholder welfare (Bebchuk, Fried, and Walker 2002; Bebchuk and Fried 2004). Jensen (1993) observes that “encouraging outside board members to hold substantial equity interests would provide better incentives.” In a similar spirit, the National Association of Corporate Directors (National Association of Corporate Directors 1995) proposed that “boards should pay directors solely in the form of stock and cash — with equity representing a substantial portion of the total up to 100 percent.” Indeed, equity-based BoD compensation has been on the rise in recent years (Bhagat and Black 2002; Conference Board 2006; Pearl Meyer & Partners 2007).1 The underlying premise is that equity awards help align BoD incentives with shareholder interests and enhance long-term firm value (Byrne 1996; Gabrielle 2001). However, to the extent that directors hold both vested and unvested (restricted) equity-based instruments, their actions are likely influenced by a combination of short-term and long-term incentives. The literature has focused mainly on the beneficial long-term incentive effects of equity awards. However, the effects of accompanying short-term incentives are not clear. Are they non–value adding, or do they in fact affect BoD behavior in a way that benefits shareholders? We address these questions in this paper. In particular, our purpose is to jointly examine the short-term and long-term incentive effects of equity-based BoD compensation on the BoD’s corporate governance (contracting and monitoring) and advisory (consulting) roles.2 The boards’ corporate governance role has been examined extensively.3 However, directors are typically individuals with considerable management experience and expertise and serve as a natural resource for top management in making crucial strategic and operational decisions.4,5 In fact, surveys have indicated that most directors view advising as their primary role (Mace 1972; Demb and Neubauer 1992; Adams 2009). Nevertheless, the BoD’s advisory role has received relatively little attention in the literature. Adams and Ferreira (2007), for example, examine the BoD’s monitoring and advisory role and show that a less independent BoD is sometimes optimal because it is less likely to monitor management, which, in turn, induces management to share information with the BoD, and receive better advice leading to greater investment efficiency.6 If this advisory role is indeed value-enhancing for shareholders, it cannot be ignored when examining the short-term and long-term incentive effects of BoD compensation. We use a simple agency model in which the BoD performs three roles: contracting, monitoring and consulting. The BoD contracts with the manager to supply some productive input that results in firm output. A performance evaluation system that produces an informative signal about firm output, and consequently about managerial effort, is used to contract with the manager. By monitoring, the BoD improves the precision of this information signal. By serving as a consultant, the BoD makes the manager more productive, that in turn means higher expected firm output. The BoD and the manager’s inputs are unobservable and personally costly.7 We assume that board members are themselves rational and self-serving, and must be motivated to provide consulting and monitoring inputs. Consequently, there are two agency problems in our model. The first is between the BoD and the manager, and the second is between the BoD and the shareholders. Both the agency problems arise because the BoD and manager’s respective inputs are unobservable and personally costly. In this respect, our paper adds to the growing literature that models shareholder-manager conflict as arising from a two-tier agency relationship. In our context, a single-tier model that examines shareholder-manager agency conflict stemming from the separation of ownership and control does not permit a role for the BoD. Therefore, by examining a multi-tier agency relationship our paper helps us better understand organizations (Bolton and Scharfstein 1998). In related work, Kumar and Sivaramakrishnan (2008) examine the BoD’s corporate governance role using a double agency model. They focus on the impact of the lack of BoD independence from management on corporate governance, and characterize optimal equity awards to the BoD to create the right BoD incentives. Harris and Raviv (2008) present a model where control of the board can be given to either insiders (the non-independent board) or outsiders (the independent board) — both insiders and outsiders have private payoff-related information. They show that it is sometimes beneficial to give board control to insiders in order to better exploit their information. We begin our analysis by examining a benchmark setting in which the BoD’s inputs are commonly observable. In this benchmark case, it suffices to compensate the BoD for the personal cost of providing consulting and monitoring inputs. When the BoD’s inputs are not observable, explicit BoD incentives become necessary. We show that long-term incentives (i.e., incentives tied to firm output) make the BoD explicitly care about the firm’s output and thereby motivate the BoD to play an active consulting role. Thus, compensating the BoD with restricted stock awards (equity) motivates the BoD to supply consulting input. However, we identify conditions under which long-term incentives alone do not suffice in motivating the BoD’s monitoring input. The is that the BoD’s monitoring input improves the of the performance evaluation system used to managerial and has on firm output. The BoD, does not have incentive to supply monitoring input. the need for short-term incentives. 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In this we examine the effects of short-term and long-term incentives on the corporate governance (contracting and monitoring) and management advisory (consulting) of the BoD using a two-tier agency primary is that long-term incentives not suffice and that short-term BoD incentives can play a role in shareholder as restricted equity provide the BoD with the incentive to supply consulting by not motivate the BoD to monitor when monitoring is personally to the BoD. 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We that managerial is a primary BoD Recent corporate governance as the of shareholder and shareholder to directors have this In our monitoring is not a for is because the way can in our model is the manager to supply productive when is expected to supply productive there is in — the manager productive In in our managerial is and monitoring can be as the cost of in where we performance we do not view monitoring as a way to the improves the precision of the performance and the effects of it does not the BoD to If the BoD with some managerial a would that the manager does not in The role of short-term BoD incentives in a setting where the primary is is not clear. be an for is to that shareholder and BoD interests be for can create incentives for directors to provide consulting and monitoring inputs the for directors of is is that directors some benefits personal or have for when be as directors for short-term In this the of boards that directors can serve as and shareholder and not be in the our analysis makes a for providing explicit incentives to align interests and of the BoD, a recent by to a a in the by making corporate boards more and to have been in to recent the of stock by some address this the cost of incentive that we have in this paper. We use and to conditions that the BoD’s consulting input improves or the of about the manager’s productive input. can be that the of to that is and as Thus, We the to We that that Therefore, the of about the manager’s productive input improves when the BoD consulting can be that the of to the as we can that We to identify conditions that the of and for that the BoD’s consulting input does not affect the manager’s expected compensation we the by and to the effects of and we to identify conditions that when the the as an of and the manager’s the is The is to the firm’s expected output of the BoD’s and manager’s compensation. The the BoD and the that the BoD consulting input. the that BoD are The is to the firm’s expected output of the BoD’s and manager’s compensation. 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Joseph Anouboussi

La thèse porte sur la problématique de l’efficience du financement intermédié des processus de croissance et de développement économiques. Elle s'intéresse d’une part à la résolution des problèmes d’inefficience liés à la présence d’asymétries informationnelles et de l’incertitude sur les marchés du crédit grâce aux mécanismes réputationnels mis en œuvre dans le cadre des relations de long terme banques-emprunteurs et d’autre part, aux conditions dans lesquelles ces mécanismes peuvent émerger et se développer, en particulier dans un pays en développement comme le Cameroun.La thèse a donc une portée à la fois conceptuelle, empirique et normative.En premier lieu, nous avons cherché à alimenter le débat théorique sur la pertinence et l'intérêt du mécanisme réputationnel dans le processus d’intermédiation bancaire. Nous montrons que, contrairement aux modèles habituels d’intermédiation de la théorie d’agence, où les mécanismes de sanctions ou de coercitions judiciaires restent souvent inefficaces et coûteuses, le caractère auto-exécutoire du mécanisme de la réputation suffit seul à garantir l’efficacité de son fonctionnement. De plus, le mécanisme réputationnel nous semble mieux concilier deux conceptions opposées du comportement des acteurs que sont l’homo economicus et l’homo sociologicus. De ce fait, ce mécanisme est susceptible de constituer un cadre d'analyse intéressant pour la modélisation des comportements bancaires notamment dans le contexte des PED africains où les incertitudes restent exacerbées et où prédominent des rationalités économiques beaucoup plus fondées sur les valeurs. En second lieu, les résultats de notre enquête statistique de terrain permettent de montrer qu'au Cameroun, par rapport aux Institutions Financières Décentralisées (IFD) comme la MicroFinance, les Institutions Financières Formelles (IFF) semblent accorder une moindre importance aux pratiques réputationnelles dans leur comportement d'allocation des capitaux, en particulier aux PME. Ceci est susceptible d'apporter une des meilleures explications au différentiel de performance micro-économique, se situant ici à l'avantage des IFD.Enfin, la même enquête nous permet de mettre fortement en évidence l'existence de nombreux facteurs à la fois internes et externes empêchant aux deux catégories de banques une meilleure prise en compte du mécanisme réputationnel. Ce constat nous conduit à proposer des axes ou pistes de réflexion, à formuler et à justifier un ensemble de recommandations à la fois organisationnelles, institutionnelles et réglementaires associées. Ceci dans l’objectif de construire un système bancaire camerounais plus fiable et plus solide en incitant les banques à mieux intégrer les pratiques réputationnelles dans leur jugement d'octroi de crédit aux emprunteurs.

Marina Zaharioaie, Irina Bosie

Development of public services is the effect of applying administrative reforms involving the banks and financial contribution. Decentralization strengthening and modernization of administrative structures and public services is supported by the World Bank, International Monetary Fund and the European Union, supplement the financial resources to facilitate development. To attract financing funds, local governments often resort to loans from the banks that manage the funds targeted. Money is used to supplement the income of local governments who needs loans for financing European projects. Empirical research on this way will make disclosures regarding the various types of banks involved in this process.

Faruk Ülgen

Decentralized internal rating based models (self-regulation) which are substituted to public regulation are not able to hold a long-term macroeconomic vision or to take into account interdependencies among private units and markets. Therefore, they seem to be unable to tackle with systemic crises. Moreover, liberal supervision schemes reduce the field of action of monetary authorities and limit the systemic range of their interventions in case of large crisis. Then the absence of macro-regulatory schemes reveals to be one of the causes of the appearance and the persistency of generalized financial crises. A reappraisal of the Minskian financial instability hypothesis and the results of models of conventions, of financing by LBO and of cognitive dissonance points out that the current financial crisis casts doubt on two principles of the way of regulation of modern capitalism: 1) The capacity of market mechanisms for correcting errors of judgment of decentralized actors without structural public interventions; 2) The efficiency of the self-regulation of markets regarding public regulation schemes. These principles turn out to be unable to ensure the continuity in market relations under their present form. So, new research becomes compulsory in order to imagine new macro-prudential mechanisms seeking to strengthen the viability of economic and monetary relations.

Anton Korinek

No abstract is available for this record.

P. Trucco, Diana Tussie

No abstract is available for this record.

Helge Peukert

First, Veblen's distinction between industrial and pecuniary employments with special regard to speculation is introduced. Second, investment banking as a prime example for pecuniary activities is presented. Third, a dominant fundamentalist, market efficiency and a heterodox speculation paradigm of financial markets are distinguished. Fourth, ten proposals for financial market reform (e.g., decentralization) are proposed. Finally, it is asked why these reforms, which should support a productive-serviceable function of finance, will not be realized. This is due to a capturing of the public sector and the prevailing scientific and ideological habits of thought.

Peter G. Klein, Marc R. Saidenberg

We provide evidence on organizational structure and performance at bank holding companies (BHC's). First, we show that a BHC's member banks benefit from access to internal capital markets. Second, we ask if these benefits are best realized within loosely structured, decentralized organizations or more consolidated, centralized firms. We find that BHC's with many subsidiaries are less profitable and have lower q ratios than similar BHC's with fewer subsidiaries. However, because we study multi‐unit firms in a single industry, our results suggest that the diversification discount reported in the corporate finance literature reflects not only industry diversification, but also organizational structure.

Amar Bhidé

Our prosperity requires the enterprise of innumerable individuals and businesses who exercise their imagination and judgment-and bear responsibility for outcomes. And it is through dialogue and relationships that widespread enterprise is fostered, not merely prices in anonymous markets. Yet modern finance blatantly neglects these necessary elements for enterprise, and the dynamism of the real economy is stifled. For the last several decades finance has become increasingly centralized, distanced, and mechanistic. Instead of thousands of lending officers making judgments about borrowers who they know, credit decisions are the output of the models of a few Wall Street wizards and credit agencies whose mistakes have widespread, sometimes disastrous consequences. A Call for Judgment explains in a clear way how bad theories and mis-regulation have caused this dangerous divergence between the real economy and finance. Bhide accessibly lays out how so-called advances in modern finance helped mass-produce toxic products, based on backward-looking, top-down models that have no place in today's dynamic and decentralized world. Thanks to excessively tight securities laws and loose banking laws, anonymous transactions have displaced relationship-based finance. Returning to relationships and case-by-case judgment requires at a minimum tough rules that limit banks-and all deposit taking institutions-to basic lending and nothing else. Financing the Venturesome Economy is essential reading for anyone interested bringing the economy back to a point at which decisions can be made that foster organic economic growth without the potentially disastrous risks currently accepted by modern finance.

Zhou Jie, Xiaopei Ding, Liyuan Han, Zhihui Gu

No abstract is available for this record.

Anton Korinek

No abstract is available for this record.

Harry Garretsen, Michael Kitson, Ron Martin

Traditionally, the geography of money has been a topic of only marginal or peripheral interest to economists. To be sure, economists have long studied banking, the operation of national financial and monetary systems, international capital movements and the like; but in typical economics fashion, the spatial frames and contexts within which banking, financial systems and capital markets operate have not of themselves been of interest and have typically been considered as exogenous and pre-given. Even geographers tended largely to ignore the spatialities of finance. Admittedly, in the 1970s and 1980s, there were some studies of regional banking structures, urban mortgage markets, regional credit availability and regional interest rate differentials; but the studies that appeared hardly added up to a substantial or coherent body of theoretical or empirical research. During the 1990s, however, the relationship between money and space began to attract increasing attention, with a succession of books and papers by economists and geographers (for example, Cohen, 1998; Corbridge et al., 1994; Dow, 1990; Eichengreen and Flandreau, 1996; Laulajainen, 1998; Leyshon and Thrift, 1997; Martin, 1999; O'Brien, 1990, 1992; Porteous, 1995). Ironically, this flurry of publication occurred at the very time that developments in the world of finance were leading some of the new commentators to argue that if geography had once been of relevance for understanding money, it was rapidly becoming irrelevant. O'Brien (1990, 1992) in particular claimed that various processes, especially technological advances in information and communication technologies (ICT), the wave of financial deregulation that had begun in the 1980s in the USA and UK and a new trend of financial innovation, were together facilitating—indeed promoting—accelerating financial integration at a global scale, rendering geography and location of rapidly declining significance for financial firms, financial flows and access to financial products and services. The globalization of money, it was contended, was annihilating space. Not only was financial globalization undermining national economic sovereignty (Cohen, 1998), by going global banks were free to locate wherever they chose, and money having become electronic, and hence hyper-fungible and hyper-mobile, could now move anywhere almost instantaneously. In this brave new world of global finance, money had escaped space. Geographers on the whole have been much more cautious in pronouncing what O'Brien called the ‘end of geography’ with respect to finance. While they acknowledge that distance may have become irrelevant in financial transactions and operations, they have argued that location and place remain of crucial importance (see Leyshon, 1995, 1997, 1998; Martin, 1994, 1999). The spatial concentration of banks, investment houses and other financial institutions in the major national (and global) financial centres has not dramatically lessened: indeed in many respects it has increased, as has the financial specializations of those centres and the competition between them. The outsourcing and offshoring of certain financial functions and services (such as call centres), themselves developments facilitated by ICT and related ‘globalization’ processes, have been highly geographical in their locational dynamics and impacts. Global and national financial centres may be linked together in worldwide networks of financial flows and transactions that ignore national borders, but in so doing they also function as the portals through which monetary fluctuations, perturbations and shocks originating elsewhere are transmitted down through their domestic financial systems and economies, with highly geographically differentiated effects on the economies of different regions and cities (Tobin, 1984). In the other direction, local and regional economic imbalances within nations can trigger off inflationary pressures and house price bubbles that then not only disturb national domestic monetary conditions and management, but through the global interconnections that link financial institutions in world markets can even trigger off global monetary instabilities. And while the banking and financial systems of individual countries have become increasingly and inextricably interconnected, most retain a local or regional dimension in their organization and operation. How these local circuits of money relate to and are entwined with global circuits has major implications for the propagation and impact of financial shocks and perturbations. In short, contrary to what some argued, money remains highly geographical, even in today's globalized world. This special issue of the Cambridge Journal of Regions, Economy and Society brings together a number of papers on this issue, ranging from the geographical organization of financial centres in pre-industrial Europe to the geographical dimensions of today's global ‘credit crunch’. The four papers in this issue that deal with the geographies of finance each offer a different perspective on the spatiality of financial markets and financial transactions. By taking an historical perspective and by using mid-18th century data that precede the Industrial Revolution, Flandreau et al. (2009) explore the spatial linkages of financial transactions across Europe, circa 1750. The central unit of observation is the city, so that in effect the paper is really about the monetary geography of European cities and in particular about the extent to which ‘local’ or own-city currencies circulated ‘abroad’, that is in other cities. The mapping of the monetary geography of Europe in the paper of Flandreau et al. is inspired by three interdisciplinary approaches. The first concerns the role of states. History shows that before the ascent of the nation state, there was an intricate and almost seamless web of financial relations across Europe. With the rise of nation states, however, the monetary and financial space of Europe was progressively nationalized and compartmentalized into sovereign territories. The second approach upon which the paper builds is economic geography. The description of intra-city linkages across the Europe of the mid-18th century clearly point to the relevance of agglomeration forces. The main financial centre at that time was the city of Amsterdam, though other financial hubs or agglomerations in the European network of currency transactions are also clearly discernible. In southern Europe, the city of Genoa was for instance very important and likewise the city of Hamburg in Northern Europe. But in the hierarchy of financial centres, Amsterdam dominated, with London and Paris also being very important. A third and final approach that can be used to understand the network of financial connection across European cities is (of course) economic history. Here, the authors argue that their main result can be interpreted through the lens of modern or new institutional economic history. Whatever the analytical approach used, however, the main finding of the paper is that in pre-modern Europe, that is prior to the Industrial Revolution, there was already a dense and quite distinct spatial urban network of financial connections in Europe. Local currencies or bills of exchange circulated widely outside their own locality or city. At the same time, not all cities or bills of exchange were equally widespread: the monetary geography of Europe in those days was one in which a few cities dominated, much like in the modern monetary geography of Europe. In the literature on ‘money and space’, the geographical role or relevance of financial intermediation and banks in particular is emphasized. The claim by O'Brien (1992) that geography has become irrelevant in the modern financial system applies most to public capital markets. When it comes to the supply of and demand for bank loans, however, even casual observation suggests that proximity still matters. At the same time, in many countries the banking sector has seen structural change at an unprecedented scale in the last few decades. Banking has gone ‘global’ and this has been accompanied by a very substantial (spatial) concentration of banking. This leads to important questions about the interrelationship between global banking and local credit markets. This interrelationship is at the heart of the paper by Alessandrini et al. (2009). Using O'Brien (1992) as a point of departure, Alessandrini et al. seek to establish if and how distance still matters in the case of the Italian credit and banking market. Distance is a multi-faceted concept and the authors come up with two ways to define distance, namely ‘operational’ and ‘functional distance’, that are subsequently used in their empirical analysis. Three findings stand out. First, geography (still) matters when it comes to the Italian credit market and the way in which firms and banks interact (locally). Second, the impact of distance on the interrelationship between global banking and local credit markets is not unambiguous. This then leads to the third finding or probably more accurately an agenda for future research: geography matters when it comes to local banking structures, and banks’ own territorial strategies, as well as the relevance of the banks’ headquarters for regional development. In these first two papers on the geographies of finance, financial centres play a key role. In his paper, Wójcik (2009) takes the location of financial centres as given and tries to find out whether (non-financial) firms that are located in financial centres are more likely to go public than similar firms that are located in the financial periphery. Going public means taking the firm to the stock market via a so-called ‘initial public offering’ (IPO). Using firm-specific data for 32 countries, Wójcik shows that there is indeed a strong positive correlation between the location of firms and their IPO activity. Firms that are located in financial centres are more likely to go public. Given the high degree of (international) capital mobility and the current technological possibilities for both investors and firms to inform themselves about each other and the functioning of the stock market, one may wonder why in this case geography still matters. The author points out, for instance, that closeness to financial intermediaries may make it easier for firms to go public and also that the specialized labour that is needed for an IPO process is more readily available in financial centres. In this way, it appears that the geography of financial centres influences the capitalization process (via IPOs) of businesses. All three papers introduced so far suggest, somewhat contrary to what O'Brien (1992) claimed, that even with unhampered capital mobility geography is still relevant for many financial transactions. Even with capital free to move within or between countries, the bulk of financial transactions is or remains spatially bounded and has a distinct geographical footprint. From an international macro-economic perspective, the idea that free international capital mobility does not seem to go along with a de-nationalization of capital flows is known as the Feldstein–Horioka paradox. More specifically, the paradox here is that with free capital mobility, one would expect that national savings and national investment are no longer positively correlated. Without capital mobility, national investment is inevitably constrained by the amount of national savings. But with capital mobility, this is in principle no longer the case. However, following the seminal study by Feldstein and Horioka (1980), scores of researchers have found that for almost every country national savings and national investment are still strongly correlated. The paper by Kool and Keijzer (2009) throws new light on this issue. Using new (panel) estimations and estimation techniques for a sample of 23 countries for the period 1973–2003, they find that the Feldstein-Horioka (FH) coefficient that measures the relationship between savings and investment has in fact dropped significantly in recent years. Indeed, around the year 2000, the coefficient is no longer significantly different from zero. This suggests that economic and financial integration has increased markedly in recent years. As to the reasons behind the de-coupling between national savings and investment, the authors single out increased trade openness and especially a fall in the so-called ‘home equity bias’. The latter refers to the stylized fact that investors typically have a tendency to underinvest in foreign equity. According to Kool and Keijzer, with this bias getting weaker, the correlation between national savings and investment also has weakened. Since it is only fairly recently that the FH coefficient has fallen so strongly, it remains to be seen if this is merely a temporary phenomenon or if national savings and investment have really started to move independently of one another. The current financial crisis is a first real test in this respect. The spatial dimensions of finance have been highlighted by the current financial crisis—where a shock ostensibly emanating from the US housing market was rapidly transmitted into a global recession. In their paper, O'Brien and Keith (2009) argue that the crisis has been facilitated by the ‘end of geography’ with ICT and lightly regulated finance enabling ultra-rapid and highly complex flows of financial capital across borders. However, when reviewing the future of finance, O'Brien and Keith suggest that it is likely that the drive towards the ‘end of geography’ will be slowed by the crisis; as the level of financial regulation is likely to increase, developments in ICT may help improve the management of information, a feature that has been manifestly lacking in modern global financial markets. In any case, as discussed above, the ‘end of geography’ thesis should not be exaggerated: deregulation and ICT may promote and facilitate the movement of money and capital across space, but they do not necessarily result in a ‘geography-free’ world of finance. Furthermore, it can be argued that globalized financial markets have intensified geography by sustaining and, in some cases, intensifying spatial differences in economic prosperity and social welfare. Global capital markets have enabled countries such as the USA and the UK to run persistent balance of payments deficits by facilitating circulation of finance from those countries that have maintained persistent balance of payments surpluses. And within both the USA and UK, the recession that the credit crunch sparked off has been anything but spatially even in its impacts. The notion of the ‘end of geography’ is subject to a powerful critique by Dymski. Tellingly, Dymski (2009) argues that O'Brien's argument is a repackaging of efficient markets theory—a theory that has been left in tatters by the recent behaviour of financial markets. Dymski constructs an alternative counter-narrative where government policy is fundamental to the construction of financial markets—not only through the regulatory framework but also through the macroeconomic and industrial policies which shape the opportunities for doing business and generating profits. Furthermore, Dymski argues that global finance has not led to the emergence of a ‘global banking customer’ but has instead created a spectrum of different financial customers, which has contributed to the global divisions in income and wealth. Customers from poorer parts of the spectrum are charged higher interest rates, are more likely to suffer from foreclosure and are the first to be deprived of liquidity when crisis strikes. But, of course, the most impoverished, such as many of those in Africa, are completely disconnected from the financial system. According to French et al. (2009), the credit crunch is a ‘very geographical crisis’. They argue that the crisis has arisen from an active use of space at a range of scales and along networks of varying length which connect individuals and institutions to the financial system. Thus, the crisis has been characterized by different geographies of financial flows, wealth effects and impacts. It should also be emphasized that the financial crises has led to an economic crisis—and the geographies of the two crises are likely to be different and will be determined by the mechanisms through which the former is transmitted to the latter—as the decline in world income and trade and the inability of producers and consumers to borrow to invest and consume will have different spatial impacts and amplitudes. The paper by Bieri (2009) also counters the O'Brien position, on the grounds that the globalization of financial markets has led to a change in geography rather than its demise. Bieri contrasts the ‘old’ geography characterized by competing nation states with the ‘new’ geography comprising globally dispersed creditors and debtors with both strong local and global connections and drivers. Furthermore, such bi-polar processes will continue in the future and global financial markets will become more ‘curved and spiky, not flat’. This will create challenges for regulation and global financial architecture: the Bretton Woods system, which was established after the Second World War in the era of dominant nation states, largely remains in place today. Thus, there is a need to re-evaluate the global financial architecture and balance the need for decentralized local regulation and centralized interventions and coordination. The issue of the relationship between financial liberalization and poverty is analysed by Arestis and Caner (2009). The conventional focus is on the link between financial liberalization and growth and how the latter may influence poverty through ‘trickle down’ effects. Arestis and Caner analyse three further channels: the crises channel, the access to credit and financial services channel and the income share of labour channel. They show that although the relationships between financial liberalization and poverty are complex, the former often causes increases in the latter. Although the paper of O'Brien and Keith provides an updated view of the ‘end of geography’ thesis, the majority of papers in this issue suggest that to characterize the contemporary global financial landscape in such terms is to capture at best only certain facets of today's monetary reality. There is in fact considerable evidence that ‘money and space’ are still closely intertwined—geography has evolved and changed but its ‘end’ is not in sight. This will become even more apparent as the fallout and complex repercussions of the current financial crisis continue to feed through to the real economy throughout the globe: including house repossessions across numerous cities in the USA and UK; major plant closures, job losses and unemployment in many local communities; future major cutbacks in public sector spending programmes, to help reduce the government debt incurred by bailing out failed banks and mortgage lenders; the collapse of the Iceland economy and the need for IMF support; and the contraction of world trade, which is affecting the German and Japanese economies to such an extent that these two countries are forecast to have much deeper recessions than those countries from where the crisis emanated in the first place (IMF, 2009, 10). What recent events demonstrate so clearly is that finance may have gone global but its complex circuits are profoundly spatial in their operation and impact.

Anthony G. Hopwood

No abstract is available for this record.

Ludovic Vigneron

This research is concerned with how bank lending relationship affects small and medium-sized enterprise financing. We particularly focus on the effect of this contractual feature on their specific asymmetric information problems. We contribute in several ways to the fields of corporate finance and financial intermediation. First, we find evidence that firms which work with more likely to provide lending relationship banks, decentralised ones, use less trade credit, social and fiscal debt and leasing. They appear to access more easily to bank credit. Second, we note that small and mediumsized enterprises choose their main bank for their ability to deal with the kind of information they can provide. Firms with hard information prefer to borrow to centralized banks and firms with soft information prefer to borrow to decentralized ones. Those which can't work with a bank of good type are more credit constrained. Third, we show that bank lending relationship improve collateral efficiency in credit contracts. It allows banks to offer separating equilibrium based on two dimension contracts: interest rate and collateral level. The information transfer during the relationship prevents agency costs associated with collateral. So good project holders can credibly signal themselves giving more collateral to obtain lower interest rate. By doing this, banks limit credit rationing in this context

Yuanyuan Zhang

The paper considers a three-tier credit chain consisting of a bank, a logistic company and a retailer. The paper analysis the following outsourcing structure implemented by top-tier bank: inhouse consignment, under which the bank signs independent contracts with the logistic company and the retailer. Under the assumption that the logistic company cannot change its decision, the paper investigates the equilibrium behavior of the decentralized credit chain with non-cooperation newsvendor under demand uncertainty. The model includes the case of a risk-neutral bank offering loan to a noncooperative risk-neutral retailer who mortgages its inventory to the bank to finance more inventory. The retailer faces a random demand in a single sales season as in the classical newsvendor problem. By game theorem, the paper gives the optimal loan to value to retailers with different initial capital.

Fabian Garavito

No abstract is available for this record.

Patricia Clarke Annez, Gwénaelle Huet, George E. Peterson

This book takes a look at the past to gain insights for the future. Nearly 30 years ago, when the world urban population was only about half of the 3 billion that it is today, when most Less Developed Countries (LDCs) were primarily rural, and before the wave of decentralization of the 1980s and 1990s, the World Bank developed an instrument with great potential. The key characteristics of this instrument, the Urban Infrastructure Fund (UIF), are several. It provides finance for an array of urban services, not just one sector, such as water and sanitation, leaving flexibility for local beneficiaries to set their priorities. UIF projects operate in more than one city. Perhaps the most important distinctive feature is that these projects use local institutions to do the work of identifying, appraising and channeling finance to subnational entities (municipalities, local utilities, or community groups) on behalf of the World Bank. This arrangement makes it feasible to reach beyond the major capitals or business centers such as Chongqing, Mumbai, or Sao Paulo, or even regional capitals, to fund much smaller subprojects, suited to the needs and capacities of smaller cities and towns, because local agents are tasked with identifying and appraising these projects. Delegating these functions makes it practicable not only for a large International Financial Institution (IFI) such as the World Bank but also for national governments to reach small municipalities. Providing support to large numbers of municipalities with relatively small investment needs is a complex task, but it is fundamental to scaling up beyond small pilot projects to programs improving urban services countrywide.

Kathleen S. McArthur

ACILITATING urban infrastructure development and promoting the growth of local capital markets are among the most important development objectives for Latin America.For the most part, however, multilateral development organizations such as the World Bank and the Inter-American Development Bank (IDB) have addressed these two development issues separately.Multilateral-sponsored infrastructure development initiatives have focused primarily on providing technical assistance, equity grants, and subsidized bank loans, while capital markets development initiatives have consisted largely of policy-based advising and advocacy of structural reforms.'This Note proposes the use of multilateral-sponsored, local-currency municipal bond insurance to the most credit-worthy Latin American municipalities as a more leveraged, holistic approach to promoting development.Of the few multilateral-sponsored credit guarantee programs that have been implemented, most are designed for private capital investments and, in limited circumstances, sovereign debt securities. 2 A multilateral-sponsored municipal bond insurance program could reduce municipalities' financing costs for specific projects and encourage decentralization within the region, while simultaneously promoting the growth of domestic capital markets by encouraging greater reliance on these markets by Latin *J.D.

Britta Klagge, Ron Martin

In recent years, stimulated by globalization, technological innovation and intensifying international competition, there has been a growing trend towards the increasing institutional and geographical concentration of financial systems and markets. At the same time, there has been mounting academic and policy interest in the financing problems faced by new and small firms, which are widely considered to suffer from a ‘funding gap’. These twin developments provide the motivation for this paper, which seeks to throw some theoretical and empirical light on the question of whether the spatial organization of the financial system impacts on the flows of capital to small firms across regions. Is it the case that a heavily spatially-centralized financial system, like that in the UK, militates against the ready access to capital by new and small firms in peripheral regions, while a more decentralized financial system, like that in Germany, results in a more even regional distribution? The paper first discusses this question theoretically in the context of the regional finance literature. It then compares capital market structures and the regional distribution of equity for SMEs in the UK and Germany. This comparison lends some support to the view that capital markets do not function in a space-neutral way, and that a highly centralized system like that in the UK may well introduce spatial bias in the flows of capital to SMEs. It also shows, though, as the case of Germany illustrates, that the actual impact of the geographical organization of capital markets depends on, and is mitigated by, other institutional and regulatory conditions. Our analysis suggests while a geographically decentralized financial system with sizable and well-embedded regional/local clusters of institutions, networks, agents, and markets could be advantageous in various ways, regional/local capital markets also face a number of major challenges and problems. The paper indicates the need for more research in this somewhat neglected area.

Roger Aliaga‐Díaz

Capital adequacy regulations specify a minimum capital-to-assets ratio for banks in the economy. The effects of these regulations on the level of economic activity have not been thoroughly studied by the banking regulation literature. Specifically, the fact that as proposed by the Basle Accords, a constant ratio tying bank lending to bank equity may reinforce macroeconomic fluctuations has been looked at by only a few existing theoretical papers. This paper proposes a stochastic dynamic general equilibrium model to study the interactions between the banking sector and the aggregate level of economic activity. Banks behavior is fully micro-founded. Banks financing decisions (equity versus deposits) are constrained not only by the regulation but also by a financial imperfection arising from the fact that during bad times banks find it difficult to recapitalize by raising equity. Thus, higher borrower bankruptcy rates during recessions imply that banks have to cut new loans until the ratio is restored to the required level. Since production firms can only imperfectly substitute bank lending with other forms of financing, a negative macroeconomic shock affects production and investment both directly and indirectly through the bank loan supply. This banking regulation and the financial imperfection imply two different constraints to the banks problem that bind only occasionally in the stochastic steady state. This prevents the use of standard linearization techniques to solve the model numerically. Alternatively, using some discretization of the state space methods such as Value Function Iteration is difficult because the model cannot be written in terms of a central planner problem. Following Fackler (2003) I solve the decentralized general equilibrium problem by using a very general Function Approximation technique that nests the Parameterized Expectation Approach as a particular case. The method allows to approximate numerically either the policy functions or the expectation functions. It is also flexible as regards the choice of approximating functions, including Chebyshev polynomials and piecewise polynomial splines. The technique relies on the Collocation Method to solve for the polynomial coefficients in combination with either generic root-finding algorithms or a fixed-point iteration scheme. Numerical results suggest that banks try to anticipate aggregate shocks by accumulating a buffer of capital over the regulatory minimum. Nevertheless, a series of bad shocks may be strong enough to eventually undermine these "reserves" and to make banks cut back on lending. This suggests the existence of a financial accelerator, since the supply of loans shrinks together with the demand during recessions. This mechanism has interesting policy implications and provides grounds for a procyclical value of the required capital-to-assets ratio

Rocco Macchiavello

No abstract is available for this record.