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Financial Crises and the Transmission of Shocks (Hosted by U.S. Office of Financial Research)

Paper Session

Saturday, Jan. 7, 2017 1:00 PM – 3:00 PM

Sheraton Grand Chicago, Chicago Ballroom IX
Hosted By: American Finance Association
  • Chair: Stacey Schreft, U.S. Office of Financial Research

Wholesale Funding Dry-Ups

Christophe Perignon
,
HEC Paris
David Thesmar
,
Massachusetts Institute of Technology and CEPR
Guillaume Vuillemey
,
HEC Paris

Abstract

We empirically explore the fragility of wholesale funding of banks, using transaction level data on short-term, unsecured certificates of deposits in the European market. We do not observe any market-wide freeze during the 2008-2014 period. Yet, many banks suddenly experience funding dry-ups. Dry-ups predict, but do not cause, future deterioration of bank performance. Furthermore, in periods of market stress, banks with high future performance tend to increase reliance on wholesale funding. Thus, we fail to find evidence consistent with adverse selection models of funding market freezes. Our results are in line with theories highlighting heterogeneity between informed and uninformed lenders.

Competition, Reach for Yield, and Money Market Funds

Gabriele La Spada
,
Federal Reserve Bank of New York

Abstract

Do asset managers reach for yield because of competitive pressures in a low interest rate environment? I propose a tournament model of money market funds (MMFs) to study this issue. When funds care about relative performance, an increase in the risk premium leads funds with lower default costs to increase risk-taking, while funds with higher default costs decrease risk-taking. Without changes in the premium, lower risk-free rates reduce the risk-taking of all funds. I show that these predictions are consistent with MMF risk-taking during the 2002-2008 period and that rank-based performance is indeed a key determinant of money flows to MMFs.

Asset Encumbrance, Bank Funding and Fragility

Toni Ahnert
,
Bank of Canada
Kartik Anand
,
Deutsche Bundesbank
Prasanna Gai
,
University of Auckland
James Chapman
,
Bank of Canada

Abstract

We offer a model of asset encumbrance by banks subject to rollover risk and study how secured debt issuance influences fragility, funding costs, and welfare. A banker encumbers assets to trade off expanding profitable investment funded with secured debt with greater fragility due to unsecured debt runs. We derive several testable implications about the privately optimal level of encumbrance. A constrained planner encumbers more assets, since the bankruptcy-remote pool of assets satisfies a demand for safety. We evaluate the efficacy of policy tools aimed at boosting private encumbrance levels, including interest rate cuts, capital injections, guarantees, lender of last resort, and stable funding ratios.
Discussant(s)
Adam Copeland
,
Federal Reserve Bank of New York
Benjamin Munyan
,
Vanderbilt University
Itay Goldstein
,
University of Pennsylvania
JEL Classifications
  • G2 - Financial Institutions and Services