Bank Disclosure and Incentives

August 15, 2014

By Korok Ray
In this working paper, Korok Ray proposes a microeconomic model of a bank that acts as a financial intermediary engaging in maturity transformation, borrowing short-term debt from a market of investors to fund a long term loan to a firm. The bank installs a manager who exerts costly effort to reduce the credit risk of the loan portfolio. Disclosing this credit risk to the market increases the manager’s incentives for risk management. The market rewards the manager’s early efforts to manage risk with a lower future cost of debt. When paid on bank equity, the manager is induced to better manage risk. Disclosure therefore helps resolve the moral hazard problem inside banks.


The Social Cost of Carbon

August 07, 2014

By Susan E. Dudley & Brian F. Mannix
First, we endorse the administration’s effort to arrive at a uniform social cost of carbon (SCC), to help ensure at least internal consistency across a portfolio of policies directed at reducing carbon emissions. Second, we applaud OMB’s effort to seek public comment on its technical support document (TSD), and urge the administration to follow through with scientific peer review and with other measures to ensure transparency in regulatory decisions. Third, we caution that the task of estimating the SCC was undertaken with an apparent bias that needs to be corrected before it can be taken as objective. Finally, the logical next step is not for regulatory agencies to incorporate the SCC into Regulatory Impact Analyses. Rather, the next step is to seek an international consensus on the value of the SCC and to negotiate a coordinated global policy response, which is the only way that the theoretical benefits of government actions to reduce global carbon emissions can be translated into actual results.