Report

Teaser, summary, work performed and final results

Periodic Reporting for period 2 - COMPLEXITY (Understanding the Complexity of Modern Financial Systems)

Teaser

The modern financial system has undergone immense transformation in recent years and is far more complex than ever before. In lockstep, financial regulation has also become more complex. This research proposal attempts to improve our understanding of potential drivers of this...

Summary

The modern financial system has undergone immense transformation in recent years and is far more complex than ever before. In lockstep, financial regulation has also become more complex. This research proposal attempts to improve our understanding of potential drivers of this complexity and the implications of this change on the allocation of resources.

Taking a positive rather than a normative approach, I will analyse post-crisis changes at both the micro- and at the macro-levels to create a broader understanding of complexities in the current financial system. In order to do so, I will employ a set of advanced research designs, as well as a uniquely assembled micro-level dataset covering state and privately owned financial institutions in Asia, Africa, South America and Europe.

This project will focus on two interconnected areas of research: 1) Organisation of Credit, 2) Financial regulation in a complex environment.

The aim of this project is to create a sustainable framework for the study of post-crisis financial systems, and to shape the current debate on the future of post-crisis financial structures and the development of policy in this area. Not only will this research have a considerable impact on our understanding of financial systems, it will also impact fields beyond finance, like Organisational Economics, Industrial Organisation and Development Economics.

Work performed

\"The project has at mid-term produced a number of publications:

1) How Organizational Hierarchy Affects Information Production (with Janis Skrastins) has been published in the Review of Financial Studies, Volume 32, Issue 2, February 2019, Pages 564-604
2) We are about to submit the paper titled: Political Economy of Decentralization: Evidence from Bank Bailouts (joint work with Bo Bian, Rainer Haselmann and Thomas Kick) to the Quarterly Journal of Economics. This paper has been presented at several major Universities in both US and Europe. He are just a few names: Bonn, Berkeley, Chicago, Columbia, Duke, Imperial, Northwestern, EIEF, NBER, Gerzensee, and Frankfurt.
3) Risk Management of Banks: U form vs M-form: We have now finished our research work on this project is Egypt which examines how organization form of banks affects lending.
4) Supranational Supervision: This is another paper on this theme that examines how centralization of supervisory decision making in Europe has impacted bank stability.
5) “Limits of Model-Based Regulation” is being revised for the Journal of Finance. As a working paper, it has generated a lot of interest from both policy makers and academics. I think this has really helped shape capital regulation in both US and Europe.
6) A paper on Supranational Supervision also fits into this theme of regulatory complexity.
7) The paper titled “Information, Credit and Organization” is being revised for the Journal of Financial Economics. We expect to submit this by the end of summer.

Developing Researchers:
During the period of this grant, I was able to nurture some PhD students and most have co-authored publications with me. Some highlights of their placements: David Schoneherr (Princeton University) and Janis Skrastins (Washington University St. Louis) and Bo Bian (University of British Columbia). I was the main advisor for all of these students. In addition, I was a letter writer for Emily Williams who went to Harvard University, Jan Starmans who went to Stockholm School of Economics and Jean-Marie Meier who got placed at University of Texas at Dallas.

Please also see the section on \"\"Progress beyond State of the Art\"\".\"

Final results

Part of our progress in this research has been to develop new potential research areas and specific expertise in this area of research; in particular:

-Creation of novel datasets:All the research papers involve novel datasets and cutting edge research methodologies for identification. Specifically, the paper on extraterretoriality of assets has novel methodology to back out quality of ships.

- Adopting a Multi-disciplinary approach and breadth of access: The research papers span several areas such as Law and Economics, Organizational Economics, Political Economy and Regulation. Some papers have also generated interest from regulators and practitioners.
All the paper are expected to be published in leader journals that can be accessed by everyone.

- Developing a Skilled and dedicated research team: I now have a dedicated team that looking into various aspects of financial regulation. This includes Amit Seru, Rainer Haselmann, Ray Fisman, Janis Skrastins and I expect that we will continue to do more interesting work going forward.