Collective Moral Hazard, Maturity Mismatch and Systemic Bailouts

Farhi, Emmanuel; Tirole, Jean

doi:10.3386/w15138

Cited by 307 publications

(382 citation statements)

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“…Rochet () shows theoretically that banks should face a capital requirement and a deposit insurance premium that increases with their exposure to macroeconomic factors. Farhi and Tirole () analyze the incentives of banks to coordinate their exposure to macroeconomic shocks. They argue that banks that react more to macroeconomic factors should be regulated more tightly.…”

mentioning

confidence: 99%

Macroeconomic Factors and Microlevel Bank Behavior

Buch¹,

Eickmeier²,

Prieto³

2014

J of Money Credit Banking

102

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We analyze the link between banks and the macroeconomy using a model that extends a macroeconomic VAR for the U.S. with a set of factors summarizing conditions in about 1,500 commercial banks. We investigate how macroeconomic shocks are transmitted to individual banks and obtain the following main findings. Backward-looking risk of a representative bank declines, and bank lending increases following expansionary shocks. Forwardlooking risk increases following an expansionary monetary policy shock. There is, however, substantial heterogeneity in the transmission of macroeconomic shocks, which is due to bank size, capitalization, liquidity, risk, and the exposure to real estate and consumer loans.JEL codes: E44, G21

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confidence: 99%

Macroeconomic Factors and Microlevel Bank Behavior

Buch¹,

Eickmeier²,

Prieto³

2014

J of Money Credit Banking

102

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“…Aghion, Bolton, and Fries (1999) show that bailouts can be designed so as to not distort ex ante lending incentives. Farhi and Tirole (2012) examine bailouts in a setting in which private leverage choices exhibit strategic complementarities because of the monetary policy reaction. Corbett and Mitchell (2000) discuss the importance of reputation in a setting where a bank's decision to participate in a government intervention is a signal about asset values, and Philippon and Skreta (2012) formally analyze optimal interventions when outside options are endogenous and information‐sensitive.…”

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confidence: 99%

Efficient Recapitalization

Philippon¹,

Schnabl

2013

The Journal of Finance

152

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We analyze government interventions to recapitalize a banking sector that restricts lending to firms because of debt overhang. We find that the efficient recapitalization program injects capital against preferred stock plus warrants and conditions implementation on sufficient bank participation. Preferred stock plus warrants reduces opportunistic participation by banks that do not require recapitalization, although conditional implementation limits free riding by banks that benefit from lower credit risk because of other banks' participation. Efficient recapitalization is profitable if the benefits of lower aggregate credit risk exceed the cost of implicit transfers to bank debt holders.

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“…Yet, when anticipated, such post‐crisis interventions can amount to put options provided by the state, free of charge to market players. These options induce market players to take more risk and hold less liquidity than would be socially desirable (Farhi and Tirole ), while expecting to transfer risk and costs to the state in the event of a crisis. This in turn increases the likelihood of a crisis and the concomitant use of post‐crisis interventions that are ex post optimal (given the crisis) but ex ante undesirable .…”

Section: The Post‐lehman Macroprudential Worldmentioning

confidence: 99%

“…In addition, herding effects can intensify, raising the odds that the state will conduct such bailouts or be induced to follow a post‐crisis accommodative monetary policy. As a result, banks may have greater incentives to correlate their investment choices (Farhi and Tirole ) and become ‘too many to fail’ or grow to become ‘too big to fail’. Moreover, the deepening of finance quickened by information technology naturally raises the incentives for players to free ride on the liquidity and information provided by denser markets.…”

Section: The Post‐lehman Macroprudential Worldmentioning

confidence: 99%

The Conceptual Foundations of Macroprudential Policy: A Roadmap

Torre

Ize²

2016

International Finance

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The global financial crisis unleashed a flurry of academic literature and regulations addressing macroprudential issues. However, reflecting weak links between research and policy as well as varying risk environments (across countries and over time), policy remains exposed to pitfalls, including overreacting, underreacting and applying the wrong or untimely medicine. To help policy makers navigate through the maze, this paper proposes a broad typology of financial frictions that classifies the root causes of socially pernicious financial dynamics under four ‘paradigms’, with distinct grounds, implications and aims for macroprudential policy: (i) offsetting the moral hazard implications of bailouts; (ii) protecting unsophisticated market participants from abusive practices; (iii) inducing market players to internalize the systemic consequences of their individual actions; and (iv) tempering destructive mood swings. As policies to curb one source of systemic risk can exacerbate others, the macroprudential policy challenge is to strike a sensible balance among complicated trade‐offs.

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Collective Moral Hazard, Maturity Mismatch and Systemic Bailouts

Cited by 307 publications

References 0 publications

Macroeconomic Factors and Microlevel Bank Behavior

Macroeconomic Factors and Microlevel Bank Behavior

Efficient Recapitalization

The Conceptual Foundations of Macroprudential Policy: A Roadmap

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