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on Banking |
| By: | Christopher Johnson (UC Davis) |
| Abstract: | The Great Recession featured a global collapse in real and financial economic activity that was highly synchronized across countries. Two unique precursors to the crisis were the rise in the shadow banking sector and increased securitization. I develop a model that is the first to explain the extent to which these factors contributed to the international transmission of the crisis that mostly originated in the United States. Using a two-country model with commercial and shadow banking sectors, I show that a country-specific financial shock leads to a simultaneous decline in real and financial aggregates in both countries. My model is the first to include both shadow and commercial banking in an open-economy framework. While commercial banks transfer funds from borrowers to lenders, shadow banks securitize loans and sell them to intermediaries internationally as asset-backed securities. Transmission occurs through a balance sheet channel, which is stronger when intermediaries hold more securities from abroad. I also consider the implications of capital controls on the transmission of a financial crisis. In general, I find that capital controls can reduce transmission. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:780&r=all |
| By: | Gopalakrishnan, Balagopal; Mohapatra, Sanket |
| Abstract: | Syndicated lending allows participant banks to offer larger loans for longer tenors. A diversified syndicate structure, which includes both domestic and foreign banks, can aid in reducing their risk and alleviate information asymmetry in loan contracting. Using cross-country data on syndicated loans obtained by non-U.S. firms, we find that a diversified syndicate structure is associated with lower loan spreads for riskier borrowers compared to loans made by non-diversified syndicates. We also find that the positive effect of a diversified syndicate on loan terms is more pronounced during periods of greater economic policy uncertainty, when information asymmetry tends to be higher. The baseline findings hold across subsamples of the data and are robust to alternative specifications and controls for selection effects. Our findings provide evidence on the benefits of a diversified syndicate structure in mitigating screening and monitoring costs in bank lending. |
| Keywords: | Syndicated loans; Syndicate structure; Information asymmetry; Diversification; Monitoring |
| JEL: | D82 F34 G20 G21 |
| Date: | 2019–10–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:96297&r=all |
| By: | Min Ouyang (Tsinghua SEM); Shengxing Zhang (London School of Economics) |
| Abstract: | We explore the role of corruption in assisting finance, when conventional collateralized lending is limited in economies like China. We build an agency-friction theory, in which corruption helps the bank to overcome the soft-budget constraint and induce entrepreneurs to invest in high quality projects and repay their debts. When the anti-corruption campaign causes collateral damage on corruption-backed finance, banks' search for yields leads to alternative lending based on pledging physical asset or stock shares; accordingly, the price of physical assets and the amount of equity pledge rise. We examine Chinese data at the regional level and the firm level, and find evidence supporting our theory. We argue the anti-corruption campaign alone without further financial-market institutional reforms may hinder financial intermediation, giving rise to undesirable consequences. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:944&r=all |
| By: | Alessi, Lucia (European Commission -- JRC); Bruno, Brunella (Bocconi University); Carletti, Elena (Bocconi University); Neugebauer, Katja (European Commission -- JRC) |
| Abstract: | We analyse micro and macro drivers of coverage ratios in a cross–country sample of euro area banks. Among the former, we find that coverage ratios increase with the reliance on deposit funding and when asset quality is very poor. Among the latter, coverage ratios increase with GDP growth and with more stringent supervision and macro–prudential policies, as well as with deeper NPL secondary markets. Finally, we find evidence of peer imitation behaviour, as banks with below country average coverage ratios increase coverage ratios to catch up with their peers. As for the prevalent mechanism, banks tend to enhance coverage ratios primarily by increasing loan loss reserves rather than by resolving NPLs. |
| Keywords: | loan loss reserves; non–performing loans; loan loss coverage |
| JEL: | G21 G28 M41 |
| Date: | 2019–08 |
| URL: | http://d.repec.org/n?u=RePEc:jrs:wpaper:201914&r=all |
| By: | Meraj Allahrakha (Office of Financial Research); Jill Cetina (Federal Reserve Bank of Dallas); Benjamin MUnyan (Vanderbilt University, Office of Financial Research); Sumudu Watugala (Cornell University, Office of Financial Research) |
| Abstract: | Using a novel within-dealer, within-security identification strategy, we examine intended and unintended effects of the Volcker rule on covered firms’ corporate bond trading using dealer-identified regulatory data. We use the underwriting exemption to isolate the Volcker rule’s effects separate from other post-crisis changes in bank regulation and broader trends in market liquidity. We find no evidence of the rule’s intended reduction in the riskiness of covered firms’ trading in corporate bonds. We find significant adverse liquidity effects on covered firms’ corporate bond trading with 20-45 basis points higher costs for customers even for roundtrip trades of shorter duration. These effects do not appear to be transitional. The Volcker rule appears to have increased the cost of the liquidity provided by covered firms and has not decreased the liquidity risk exposure of covered firms. Finally, the Volcker rule has decreased the market share of covered firms. Customers appear to be trading more with non-bank dealers, who are exempt from the Volcker rule but also lack access to emergency liquidity support at the Fed’s discount window. |
| Keywords: | banking regulation, Volcker rule, heightened prudential regulation, corporate bonds, market liquidity, regulatory impact analysis |
| Date: | 2019–08–06 |
| URL: | http://d.repec.org/n?u=RePEc:ofr:wpaper:19-02&r=all |
| By: | Takaaki Koike; Marius Hofert |
| Abstract: | We propose a novel framework of estimating systemic risk measures and risk allocations based on a Markov chain Monte Carlo (MCMC) method. We consider a class of allocations whose j-th component can be written as some risk measure of the j-th conditional marginal loss distribution given the so-called crisis event. By considering a crisis event as an intersection of linear constraints, this class of allocations covers, for example, conditional Value-at-Risk (CoVaR), conditional expected shortfall (CoES), VaR contributions, and range VaR (RVaR) contributions as special cases. For this class of allocations, analytical calculations are rarely available, and numerical computations based on Monte Carlo methods often provide inefficient estimates due to the rare-event character of crisis events. We propose an MCMC estimator constructed from a sample path of a Markov chain whose stationary distribution is the conditional distribution given the crisis event. Efficient constructions of Markov chains, such as Hamiltonian Monte Carlo and Gibbs sampler, are suggested and studied depending on the crisis event and the underlying loss distribution. Efficiency of the MCMC estimators are demonstrated in a series of numerical experiments. |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1909.11794&r=all |
| By: | Linh D. Nguyen; Bertram Steininger |
| Abstract: | Under-pricing the default risk is inevitable in a market with many lenders. Our study examines the impact of under-priced default risk on investment in the REIT sector where firms’ investment is highly sensitive to changes in credit market conditions. We find that REITs exploiting under-priced default risk have a higher level of investment than REITs that do not because the former could obtain access to loans having low rates of interest. In addition, REITs prioritize the choice of investment over the leverage choice. In contrast, we find evidence that under-priced default risk does not have a significant impact on non-REITs’ investment while their leverage does because non-REITs desire to reduce costs of financial distress. |
| Keywords: | Default risk; Investment; real estate investment trust (REIT); under-pricing of default risk |
| JEL: | R3 |
| Date: | 2019–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:arz:wpaper:eres2019_288&r=all |
| By: | Thibaut Piquard; Dilyara Salakhova |
| Abstract: | We study the substitution between secured and unsecured interbank markets. Banks are competitive and subject to reserve requirements in a corridor rate system with deposit and lending facilities. Banks face counterparty risk in the unsecured market and incur an opportunity cost to pledge collateral. The model provides insights on interest rates, trading volumes and substitution between the two markets. Using transaction data on the Euro money market, we provide new empirical findings that the model accounts for: (i) borrowing banks are active on both markets even when their collateral constraint is not binding, (ii) secured interest rates may fall below the deposit facility rate. We derive and empirically test predictions on how "conventional" and "unconventional" monetary policies impact interbank markets, depending on whether marketable collateral is purchased or not. |
| Keywords: | : Monetary Policy, Interbank Markets, Secured and Unsecured Funding. |
| JEL: | E42 E52 E58 G21 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:730&r=all |
| By: | Sara Biancini (CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR1 - Université de Rennes 1 - UNIV-RENNES - Université de Rennes - CNRS - Centre National de la Recherche Scientifique, THEMA - Théorie économique, modélisation et applications - UCP - Université de Cergy Pontoise - Université Paris-Seine - CNRS - Centre National de la Recherche Scientifique); David Ettinger (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - Université Paris-Dauphine - CNRS - Centre National de la Recherche Scientifique, LEDa - Laboratoire d'Economie de Dauphine - Université Paris-Dauphine); Baptiste Venet (LEDa - Laboratoire d'Economie de Dauphine - Université Paris-Dauphine) |
| Abstract: | We analyze the relationship between Microfinance Institutions (MFIs) and external donors, withthe aim of contributing to the debate on "mission drift" in microfinance. We assume that boththe donor and the MFI are pro-poor, possibly at different extents. Borrowers can be (very) pooror wealthier (but still unbanked). Incentives have to be provided to the MFI to exert costly effortto identify the more valuable projects and to choose the right share of poorer borrowers (theoptimal level of poor outreach). We first concentrate on hidden action. We show thatasymmetric information can distort the share of very poor borrowers reached by loans, thusincreasing mission drift. We then concentrate on hidden types, assuming that MFIs arecharacterized by unobservable heterogeneity on the cost of effort. In this case, asymmetricinformation does not necessarily increase the mission drift. The incentive compatible contractspush efficient MFIs to serve a higher share of poorer borrowers, while less efficient onesdecrease their poor outreach. |
| Keywords: | microfinance,donors,poverty,screening |
| Date: | 2019–09–23 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-02294739&r=all |
| By: | Matteo, Gatti; Tommaso, Oliviero |
| Abstract: | Deposit insurance is one of the main pillars of banking regulation meant to safeguard financial stability. In early 2009, the EU increased the minimum deposit insurance limit from €20,000 to €100,000 per bank account with the goal of achieving greater stability in the financial markets. Italy had already set a limit of €103,291 in 1994. We evaluate the impact of the new directive on the banks’ average interest rate on customer deposits by comparing banks in the Eurozone countries to those in Italy, before and after the policy change. The comparability between the two groups of banks is improved by means of a propensity score matching. We find that the increase in the deposit insurance limit led to a significant decrease in the cost of funding per unit of customer deposit and that the effect is stronger for riskier banks, suggesting that the policy reduced the risk premium demanded by depositors. |
| Keywords: | Deposit Insurance, Average Deposit Interest Rate, Cost of Deposit Funding |
| JEL: | G21 G28 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:mib:wpaper:419&r=all |
| By: | Sandrine Lecarpentier; Cyril Pouvelle |
| Abstract: | The objective of the paper is to investigate how banks adjust the structure of their balance sheet as a response to a funding shock and to propose a methodology for projecting banks’ liquidity ratios in a top-down stress test scenario. In line with a theoretical model assessing the effects of capital and liquidity constraints on banks’ behaviour, we estimate the joint system of banks’ solvency and liquidity ratios, using for proxy of the latter, the "liquidity coefficient" implemented in France before Basel III. We provide evidence of a positive effect of the solvency ratio on the liquidity coefficient: a high level of solvency enables the liquidity coefficient to improve due to a more stable funding structure. By contrast, we do not find firm evidence of an impact of the liquidity coefficient on the solvency ratio. We also show that financial variables capturing international markets’ risk aversion and tensions in the interbank market have a significant impact during periods of stress only, confirming the evidence of strong interactions between market liquidity and bank funding liquidity during crisis periods. |
| Keywords: | Bank Capital Regulation, Bank Liquidity Regulation, Basel III, stress tests |
| JEL: | G28 G21 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2019-18&r=all |
| By: | Carlos Garriga (Federal Reserve Bank of St. Louis); Athena Tsouderou (IE Business School); Pedro Gete (IE Business School) |
| Abstract: | This paper documents the arrival of institutional investors in the U.S. housing market and studies their dynamic real effects. Using an instrumental variable approach we show that investors initially caused increases in housing prices and rents, mostly in bottom tier and single-family segments of the market. Investors brought liquidity and stimulated construction causing decreases in prices and rents over time. Thus, investors initially lowered housing affordability to later increase it. We also uncover a new fact post-financial crisis: housing prices have decoupled from homeownership in most MSAs in the U.S., as in many advanced economies. The presence of investors decouples housing dynamics from homeownership. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1407&r=all |
| By: | Kyle Dempsey (The Ohio State University); Felicia Ionescu (Federal Reserve Board) |
| Abstract: | How much do changes in credit supply affect consumers’ ability to insure against income risk over the business cycle and what is the valuation of such insurance? Using loan-level data from the Senior Loan Officer Opinion Survey (SLOOS), we construct measures of key credit supply variables, such as lending standards and terms for consumer credit in the U.S. and build a heterogeneous model of unsecured credit and default that accounts for credit supply dynamics as estimated from these data. Our economy is quantitatively consistent with key features of the unsecured credit market, earnings dynamics, and measures of consumption volatility in the U.S. We find that variability in standards and terms for credit is welfare improving despite the loss in consumption insurance that such an environment may induce. The key mechanism behind this result is the asymmetric effect that changes in standards induce for loan pricing in good and bad states of the economy. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1428&r=all |
| By: | Nuno Paixao (Bank of Canada) |
| Abstract: | This paper analyzes the propagation of house price shocks through the U.S. banking system. Although only roughly 30 percent of the mortgages that originated between 2000 and 2005 were retained on the banks' balance sheets, I find empirical evidence that exogenous negative house price shocks impacted the banks' balance sheets. Between 2006 and 2010, banks that faced a larger drop in their capital-to-assets ratio induced by exogenous house price shocks contracted the supply of new mortgages by more. Besides the propagation of house price shocks through the banks' balance sheets, the same shocks are also propagated across regions since more affected banks contract the credit supply even in areas where economic conditions didn't deteriorate. The drop in the credit supply by the banking system was attenuated by the presence of shadow banks, which face less strict regulatory constraints. The overall credit supply for new home purchases contracted by 5 percent more in counties with a higher presence of distressed banks (10th percentile) than in counties with a lower presence of affected banks (90th percentile). In terms of refinancing loans, the contraction is 12 percent higher in the most affected counties. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1237&r=all |
| By: | Leandro Carvalho; Arna Olafsson; Dan Silverman |
| Abstract: | This paper studies the relationship between adverse financial conditions (“misfortunes”), imperfect decision-making (“mistakes”), and the demand for high-cost credit. Imperfect choices are hard to identify; unobserved factors can justify many behaviors as optimal. We address this by linking administrative and experimental data. Bank records from Iceland detail the financial conditions associated with high-cost loan demand. The experiments manipulate constraints, while holding preferences and beliefs constant, to identify choice imperfections and measure decision-making ability. We then relate loan demand to decision-making ability and measures of constraints and preferences. High-cost borrowers are especially illiquid in the days leading up to getting a loan. They also have much lower decision-making ability: 28% of loan dollars are lent to the bottom 10% of the decision-making ability distribution, and 53% are lent to the bottom 20%. The relationship between decision-making ability and loan demand is not explained by demographic characteristics, granular information on financial conditions, or measures of preferences from the experiments, and is mirrored by the relationship between decision-making ability and an unambiguous “mistake,” the accrual of insufficient fund fees. Estimates from U.S. survey data are quantitatively similar. The results thus provide evidence that both misfortune and mistake are important for high-cost loan demand. |
| JEL: | D14 G2 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26328&r=all |
| By: | Hans Vrensen; Irene Fosse |
| Abstract: | Loan margins should reflect the risks lenders are willing to accept on the commercial real estate loans they make. Also, having a large scale, stable and low cost funding channel through covered bond issuance or syndication should benefit commercial real estate lenders in providing lower margin lending to borrowers and compete for a larger market share. This study addresses what drives lenders’ loan margins offered on a range of different European commercial real estate loans. Using internal commercial mortgage loan data over the 2012-2018 period substituted with additional data from external sources, we test several possible drivers for loan pricing, such as country risk, collateral risk, borrower business plan and lenders funding costs. With our analysis we try to show that commercial real estate lenders with large covered bond funding programs offer margins that are on average below other lenders, ceteris paribus. |
| Keywords: | Asset Pricing; Commercial real estate lending; Loan Pricing; Wholesale funding |
| JEL: | R3 |
| Date: | 2019–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:arz:wpaper:eres2019_74&r=all |
| By: | Jason R. Donaldson; Giorgia Piacentino |
| Abstract: | We develop a model in which, as in practice, bank debt is both a financial security used to raise funds and a kind of money used to facilitate trade. This dual role of bank debt provides a new rationale for why banks do what they do. In the model, banks endogenously perform the essential functions of real-world banks: they transform liquidity, transform maturity, pool assets, and have dispersed depositors. Moreover, they make their debt redeemable on demand. Thus, they are endogenously fragile. We show novel effects of narrow banking, suspension of convertibility, and some other policies. |
| JEL: | G01 G21 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26298&r=all |
| By: | Gustavo S. Cortes; Thiago Christiano Silva; Bernardus F. N. Van Doornik |
| Abstract: | We study how bank credit shocks propagate through supplier-customer firm networks. We do so using administrative data that covers firm-to-firm transactions in Brazil around the debacle of Lehman Brothers. Using the counter-cyclical reaction of government-owned banks in Brazil after Lehman's failure as a policy experiment, we show that credit shocks originated in bank-firm relationships are transmitted throughout the network of suppliers and customers, with measurable consequences for firms' real outcomes and survival probability. A firm with direct and indirect access to government credit (through its customers or suppliers) observed a 12.5% greater survival probability, vis-à-vis 4% when the firm has only direct access. Critically, we uncover drawbacks of these interventions, including a persistent increased concentration in the market share of firms that benefited from government liquidity. |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:507&r=all |
| By: | René M. Stulz |
| Abstract: | Banks are unique in that they combine the production of liquid claims with loans. They can replicate most of what FinTech firms can do, but FinTech firms benefit from an uneven playing field in that they are less regulated than banks. The uneven playing field enables non-bank FinTech firms to challenge banks for specific products whose success is not tied to what makes banks unique, but they cannot replace banks as such. In contrast, BigTech firms have unique advantages that banks cannot easily replicate and therefore present a much stronger challenge to established banks in consumer finance and loans to small firms. Both Fintech and BigTech are contributing to a secular trend of banks losing their comparative advantage as they have less access to unique information about parties seeking credit. |
| JEL: | G21 G23 G24 G28 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26312&r=all |
| By: | Laura Garcia-Jorcano (Department of Economic Analysis and Finance (Area of Financial Economics), Facultad de Ciencias Jurídicas y Sociales, Universidad de Castilla-La Mancha, Toledo, Spain.); Alfonso Novales (Instituto Complutense de Análisis Económico (ICAE), and Department of Economic Analysis, Facultad de Ciencias Económicas y Empresariales, Universidad Complutense, 28223 Madrid, Spain.) |
| Abstract: | We provide evidence suggesting that the assumption on the probability distribution for return in- novations is more influential for Value at Risk (VaR) performance than the conditional volatility specification. We also show that some recently proposed asymmetric probability distributions and the APARCH and FGARCH volatility specifications beat more standard alternatives for VaR fore- casting, and they should be preferred when estimating tail risk. The flexibility of the free power parameter in conditional volatility in the APARCH and FGARCH models explains their better performance. Indeed, our estimates suggest that for a number of financial assets, the dynamics of volatility should be specified in terms of the conditional standard deviation. We draw our results on VaR forecasting performance from i) a variety of backtesting approaches, ii) the Model Confi- dence Set approach, as well as iii) establishing a ranking among alternative VaR models using a precedence criterion that we introduce in this paper. |
| Keywords: | Value-at-risk; Backtesting; Evaluating forecasts; Precedence; APARCH model; Asym- metric distributions. |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:ucm:doicae:1926&r=all |
| By: | Haelim Anderson (Federal Deposit Insurance Corporation); Guillermo Ordonez (University of Pennsylvania); Selman Erol (Carnegie Mellon University, Tepper School of Business) |
| Abstract: | Central banks provide public liquidity (through lending facilities and promises of bailouts) with the intent to stabilize financial markets. Even though this provision is restricted to member (regulated) banks, an interbank system can in principle develop so to give indirect access to nonmember (shadow) banks. We construct a model to understand how the network may change in the presence of Central Bank interventions and how those changes can translate into more room for contagion and an endogenously higher financial fragility. We provide evidence that upon the introduction of the Fed’s lending facilities in 1914, aggregate liquidity declined and systemic risks increased. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1285&r=all |
| By: | Lukasz Drozd (Federal Reserve Bank of Philadelphia); Michal Kowalik (Federal Reserve Bank of Boston) |
| Abstract: | We analyze the role of promotional "teaser" rates on credit card plans prior, during, and after the 2007-08 financial crisis. We show that promotional offers were ubiquitous prior to the crisis. They were typically chained by borrowers to, in effect, borrow for the long term on low promotional rates. We then show that promotional activity collapsed in mid 2008, which coincided with a massive deleveraging on credit card plans between 2008 and 2011. We build a new equilibrium theory that can relate these phenomenona, analytically characterize equilibrium contracts, and take it to the data. The key insight from our analysis is that a decline in the availability of promotional offerings introduced as an exogenous shock can account for deleveraging. Our model suggests this shock had a discernible impact on consumption demand after 2008, consistent with the narrative that the credit card market played a more direct role in the transmission of the 2008 financial turmoil to aggregate demand. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1047&r=all |
| By: | Thiago Christiano Silva; Benjamin Miranda Tabak; Marcela Tetzner Laiz |
| Abstract: | We contribute to the finance-growth nexus literature by showing that credit origin, bank ownership, credit modality and bank type matter for economic growth. We use a unique dataset covering 5,555 municipalities in the Brazilian economy with granular information on credit characteristics. We find that non-earmarked credit to the corporate sector associates with municipal economic growth more strongly than earmarked credit, despite the increase in relevance of the latter after the global financial crisis. We also find that the credit modality---whether it is general purpose or purpose-specific loans---associates with economic growth in different ways. Overall, credit provided by domestic private banks to the corporate sector correlates with higher economic growth rates. In contrast, only after the crisis the relationship between credit from state-owned banks and economic growth becomes statistically significant. While we follow the finance-growth literature in our empirical exercises using internal instruments in GMM estimations, we also provide robustness tests using two additional external instruments: the number of complaints filed against each bank and the local credit accessibility. Our results with external instruments indicate the same findings with respect to the use of traditional internal instruments in GMM estimations. |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:506&r=all |
| By: | Nathaniel Pancost (University of Texas at Austin McCombs Sc); Roberto Robatto (University of Wisconsin-Madison) |
| Abstract: | We study optimal capital requirement regulation in a dynamic quantitative model in which deposits facilitate real economic activity and thus the value of deposits is microfounded. We identify a novel general equilibrium effect that drives a wedge between the private value of deposits (i.e., the value to price-taking agents, measured by the deposit premium) and the social value of deposits (i.e., the value that matters for regulation). The wedge reduces the social value of deposits, and as a result, the optimal capital requirement is substantially higher than in comparable models in the literature. Nonetheless, even when the marginal social value of deposits is very low, setting capital requirements too high is suboptimal. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:638&r=all |