“Capital Requirements in a Quantitative Model of Banking Industry Dynamics” by Dean Corbae and Pablo d’Erasmo
Discussion Matthias Kehrig
CIREQ Macroeconomics Conference, April 27, 2012
1 / 12
Outline
1
Background 2008 Research and policy questions
2
The Model What this model is (not) about Main mechanism Questions & Suggestions
3
Conclusion
2 / 12
Background
Global Financial Crisis made clear the need to understand financial sector of economy since then lots of research on the effects of financial frictions and financial shocks: Jermann/Quadrini (2012), Christiano et al. (2012), Kiyotaki/Moore (2007), ... important research agenda with continued relevance for policy
3 / 12
Research and policy questions
Research: How do financial shocks impact the real economy? Ho do financial frictions shape the transmission of aggregate shocks? How does the institutional setup shape fluctuations? Policy: How can policy prevent/mitigate the impact of bank failures? How can financial regulation help prevent/mitigate the impact of bank failures? ⇒ This paper.
4 / 12
What this model is (not) about What this model does develops an industry model of banking with financial frictions and regulation considers industry equilibrium and business cycle fluctuations quantitatively assesses how equilibrium varies with industry structure and regulatory changes What this model does not do does not consider a financial crisis nothing systemic no “interventionist” policy measures: bailouts, liquidity injections, unconventional monetary policy, ...
5 / 12
The model at a glance Asset Markets
Deposit Insurance τ
(1+ra)a
Δ
a
p(1+rL)l +
(1-p)(1-λ)l
(1+rD)d
Depositors
Borrowers
Banks l
d
(1+rB)B
pick R with success probability p(R,z)
B
Interbank Market 6 / 12
The model – mechanism Imperfect Competition: 1 Stackelberg leader (assumed) plus competitive fringe Lending inefficiency due to limited liability of borrowers worsened by imperfect competition Constraints for banks: equity requirement a≥
d − l(1 − φ) 1 − wφ
liquidity requirement a ≥ γd collateral constraint in interbank borrowing a ≥ (1 + rB )B
φ, γ, w ∈ (0, 1) are policy parameters 7 / 12
The model – the fundamental trade-off In an unregulated environment (φ = γ = 0), banks ... put all deposits into loans have a high value V ⇒ lots of entry and failures in banking give out lots of loans at a lower loan rate ⇒ measure of failing loans large (although borrowers do not choose very risky projects) ⇒ problem: competitive economy, but lots of bank failures In a tough regulatory environment (φ, γ, w close to 1), banks ... put more deposits into T-bills have a low value ⇒ little entry and failures in banking give out less loans at a higher loan rate ⇒ problem: less competition, high loan rates, measure of failing loans small (although borrowers choose very risky projects) 8 / 12
Questions & Suggestions I What is welfare? Are bank failures (due to lending inefficiency) really that bad? Trade-off bank failures vs. high-return investment projects (high R) ⇒ Consider a welfare measure that captures both banking and investment sector.
Are bank failures (due to lending inefficiency) really that bad? They are covered by non-distortionary taxation. ⇒ introduce households choosing deposits (versus other assets) and introduce distortionary taxation on different assets ⇒ higher welfare loss without regulation when taxation distortionary
In a recession with lower measure of banks operating there is more “gambling” by borrowers (higher R) ⇒ Are recession cleansing? ⇒ Do recessions induce super-productive investment projects? ⇒ Focussing on loan rates and quantities maybe a little narrow?
Only one regulatory requirement (equity or liquidity) will bind Which one? In which state of the world? 9 / 12
Questions & Suggestions II The size distribution Are small or big banks important for aggregates, welfare (bankruptcy, mark-ups)? in the world: big (or heavily connected) banks in the model: small banks Interbank lending in the world: very important in recent downturn in the model: rB fixed ⇒ endogenise? Alternatively: time-varying distribution of liquidity shocks (δ) Assumption about bank industry structure a bit ad hoc empirically: Top 1% versus “Bottom” 99% theoretically: oligopoly with only one “big player” ⇒ but interaction among “big players” probably matters most
10 / 12
Questions & Suggestions III Other Cross sectional distribution liquidity and productivity shocks determine cross sectional distribution of banks paper does a careful job at characterising the distribution ⇒ use that to discipline the model parameters!
Systemic crises; what if banks hold each other’s equity as a third asset? Now consider failure of the big bank (financial crisis). Can capital/liquidity requirements prevent/mitigate that? Policy measures other than regulation (esp. towards large bank)? Bailouts? Equity injections? New lending facilities?
Outlook: Optimal policy (monetary and regulatory)?
11 / 12
Conclusion
nice paper that takes regulatory environment seriously serious quantitative work ⇒ main aspect what we can learn from it policy relevance: what do Basel III requirements do? in a setting with imperfect competition policy and imperfect competition interact
``Capital Requirements in a Quantitative Model of Banking Industry ...
How can financial regulation help prevent/mitigate the impact of ... and regulatory changes ... Only one regulatory requirement (equity or liquidity) will bind.
Jan 25, 2017 - of capital requirements on bank risk taking, commercial bank failure, and market .... facts relevant to the current paper in our previous work [13], Section 2 ...... the distribution of security holdings of the big bank is lower than t
Jul 15, 2014 - of capital requirements on bank risk taking, commercial bank failure, and market ..... facts relevant to the current paper in our previous work [13], Section ...... the distribution of security holdings of the big bank is lower than th
Jan 25, 2017 - (TACC) at University of Texas at Austin for providing HPC resources ..... in unconsolidated subsidiaries and associated companies, direct ...... We assume that the support of δ for big banks is large enough that the constraint.
May 24, 2017 - Introduction. Data. Model. Equilibrium. Calibration. Counterfactuals. Conclusion ... bank lending by big and small banks, loan rates, exit, and market ...... assess the quantitative significance of capital requirements. 28 / 112 ...
Mar 21, 2013 - industry consistent with data in order to understand the relation .... it does allow us to consider how a big bank's loan behavior can ...... In Figure 11, we analyze the evolution of loan returns by bank size (when sorted by loans).
Apr 11, 2013 - loans? â» Big banks increase loan exposure to regions with high downside risk. ... Document Banking Industry Facts from Balance sheet panel data as in Kashyap and Stein (2000). ...... Definitions Entry and Exit by Bank Size.
Feb 11, 2014 - banks) takes the form of external debt which is subject to default risk. The model shows the .... While this paper is focused on bank capital regulation, the key ...... t+1 conditional on the information avail- ...... securityâ, mime
Feb 11, 2014 - of their capital accumulation, (iii) non-trivial default risk in all classes of .... a way, our paper provides a bridge between this literature and the ... these prices and of macroeconomic variables more generally, calling for policie
Jul 29, 2017 - the degree of underaccumulation is much smaller â the ..... time, and the previous studies show that the optimal tax and education policy can be .... In the online appendix E, we discuss the impact of the modeling choice (time vs. mo
transportation, cash reserves or market information. Roaster companies have ... distribution channels, cost disadvantages independent of scale, and government policy. Indeed, product differentiation is the .... Lee is the first in ground coffee sales
A Vintage Capital Model of Investment and Growth: Theory and Evidence by. Jess Benhabib. New York University. Aldo Rustichini. AT&T Bell Laboratories and. Northwestern University. * We thank Buzz Brock, Prajit Dutta, Chris Flinn, Roman Frydman, Dermo
solvency, the logic behind calls for higher capital requirements is awed. The ... to multiple rather than limited liability. Similar to the United States, Canadian. 3 ..... One way to alter bank incentives is to impose some form of contingent liabili
5.3 Who Buys ADSL? ... B.4 PSTN to ADSL Transition Sensitivity . ...... When contemplating the issue of computational tractability and speed, itrs interesting ..... seems left(skewed and this is confirmed by a DrAgostino test for skewness, so a ...
liability with deposits insured by the Federal Deposit Insurance Corporation. Despite this ..... became a limited liability corporation in 1883. .... âMuch Ado About.
laws that required members of the boards of directors to purchase a minimum amount of equity in ..... liability is reason- able, shareholders of Irish banks were subject to post-sale-extended liability in .... The Business Lawyer, Vol. 12, No. 3, p.
Jun 11, 2017 - create feedback loops, amplify the effects of shocks and make the ... Reserve sets the countercyclical capital buffer taking into account a. 2 ...
Nov 6, 2002 - we multiply it by a factor of 10,000, which is the index of a monopolist in a market. ... and debit cards) and the bank's expertise and overall quality and ..... 39A commercial bank is a business that accepts deposits of money ...
Nov 6, 2002 - cial banking sector over 1993-1999, using a data set that combines ... and, coupled with a model of supply conduct, provides a tool for the analysis of competition .... proportion of banks fall in the big and medium-sized categories. ..
Apr 16, 1998 - relief and study their properties in a general way, given the wide variations ... to describe what one might call a reference model for cer- tain key ...
