Chained Credit Contracts and Financial Accelerators

Abstract

Sufficiently high net worth of financial intermediaries (FIs) is considered a necessary condition for financial and macroeconomic stability. In this paper, we explore why the net worth of FIs is important as compared to that of nonfinancial firms using a dynamic general equilibrium model, in which both FIs and nonfinancial firms rely on costly external debt. We find that an exogenous disruption of the FIs' net worth has a greater aggregate impact than does the same-sized disruption of the nonfinancial firms' net worth. The key reason is that the net worth of the FIs in the United States is small.

Understanding Bank and Nonbank Credit Cycles: A Structural Exploration

“…Importantly, our model specifies financial frictions that operate on both the productive nonfinancial sector and the financial sector. This feature implies that the net worth positions of the financial intermediaries and the nonfinancial sector both matter, allowing our paper to speak to the literature on the relative importance of nonfinancial versus financial sector net worth (Sandri and Valencia, 2013;Clerc et al, 2015;Hirakata et al, 2017). In contrast to those papers, in our model, there are two types of intermediaries: banks whose deposits are insured and face capital requirements and nonbanks whose deposits are risky and have leverage ratios governed by market discipline.…”

“…The steady state equity-to-lending ratio of banks is calculated from the mean equity-tolending ratio data we obtained from the FDIC. For the steady state equity-to-lending ratio of the nonbanks, we use the value computed by Hirakata et al (2017) for financial intermediaries.…”

“…Differently from our work, these papers do not model a separate financial intermediation sector. Gerali et al (2010); Sandri and Valencia (2013); Iacoviello (2015); Clerc et al (2015); Ajello (2016); Hirakata et al (2017); Afanasyeva and Guntner (2018) all formulate models with financial intermediaries, but they do not distinguish between bank and nonbank lending. To model our heterogeneous financial sector, we combine the banks featured in Clerc et al (2015) with the financial intermediaries featured in Sandri and Valencia (2013).…”

A Welfare Analysis of Macroprudential Policy Rules in the Euro Area

“…Concerning bank capital, we follow Hirakata et al (2009) by assuming the law of motion of the net wealth is made of the profits of the previous period:…”

Optimal Dynamic Capital Requirements

“…(), and Meh and Moran () in that we provide a normative assessment of capital regulation. The focus on bank fragility is shared with Markovic (), Zhang (), and Hirakata, Sudo, and Ueda (), which model bank default in a way similar to ours but do not provide a normative analysis of capital requirements. Angeloni and Faia () and Kashyap, Tsomocos, and Vardoulakis () look at the fragility induced by bank runs.…”