November - 2019
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Edina Berlinger

Edina Berlinger

is a Professor at Corvinus University of Budapest and she is also the Head of Department of Finance. Her expertise covers asset pricing and risk management and especially the financial management of student loan systems. She has participated in several research and consultancy projects including design and implementation of student loan schemes as World Bank consultant and a research fellowship at the Collegium Budapest in complex systems. She received her PhD in Economics (2004) from Corvinus University.

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Edina Berlinger, Anita Lovas: Social enterprise under moral hazard

We investigate the simultaneous optimization of four players, an entrepreneur, an advisor, a passive investor, and the state, in a one-period, two-outcome, fixed-investment analytical model inspired by (Tirole, 2006, p. 364). We understand the advisor in a broader concept, it can mean a mentor, a civil servant, a rural integrator, a venture capitalist, a consultancy firm, etc. The project offers a positive NPV only if the entrepreneur behaves which can be further improved if the advisor behaves, too. We show that this double moral hazard problem can be eliminated completely by an appropriate contract design among the three private players. Depending on the initial capital of the entrepreneur, the project may receive active financing (i.e. financing plus an advisory program), or only passive financing, or no financing at all. As the project has positive external effects, the state (community, municipality etc.) may have interest in subsidizing it. We prove that an investment subsidy or a success fee have positive effects on the incentives as the state removes the financing barriers and mobilizes private financing. A state guarantee, however, can be detrimental without any positive effect if it is given to the entrepreneur or to the advisor, therefore, this subsidy form cannot be explained in the model. A state guarantee for a passive investor, however, is feasible and even beneficial because the financial sector transforms the bad incentive system into a good one. Finally, we also present that even well-designed and well-operated state subsidy systems suffer from a special crowding-out effect as this opportunity motivates the enterpreneur to hide his initial capital and to invest less than he could afford. By this mechanism, the enterpreneur can privatize the positive externalities of the project.

Edina Berlinger, Barbara Dömötör: Wrong way risk of retail loans

Financial regulation aims to capture all risk factors financial institutions are exposed to, however, capital requirements are prescribed to be calculated separately for market, credit and operational risk. The interaction of market risk and credit risk is built in the second pillar of the new Basel framework by requiring banks to identify, measure, monitor, and control interest rate risk in the banking book. This concept decomposes the interest rate elements and investigates the distinct effects of the changes of the market liquidity spread and general market credit spread on the present value of the assets in the banking book. On the other hand, the relationship of the idiosyncratic credit spread to the market risk components – that is a general wrong way risk – are monitored only for counterparty credit risk, the credit risk of settlement of mainly derivative transactions. This paper presents the market risk of retail mortgage loans with short term interest periods, and the effect of a potential increase of interest rates on the default probability of individual borrowers. Using scenario analysis and stress testing, we suggest a methodology for commercial banks to analyze their loan portfolios and to calculate the minimum capital needs of the wrong way risk of them.

Last modified: 2019.10.08.