Optimal Bank Regulation and Fiscal Capacity

Stavrakeva, Vania

doi:10.2139/ssrn.2363133

Cited by 7 publications

(3 citation statements)

References 40 publications

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“…Two other recent papers argue that the optimal approach is a mix of bailouts and prudential policy tool(s). Stavrakeva (2017) builds a three-period model in the spirit of Lorenzoni (2008) where markets are endogenously incomplete. In order to replicate what a central planner would optimally do, regulators impose a minimum capital requirement as well as an instrument that limits intermediaries' liabilities during a crisis when a bailout is expected.…”

Section: Introductionmentioning

confidence: 99%

“…The optimal policy requires, in general, a mix of ex-post intervention (bailouts) and ex-ante prudential policy (taxes on debt and capital income). Keister (2016), Stavrakeva (2017), and Bianchi (2016) stress that the optimal policy mix involves bailouts combined with macro-prudential policy tool(s) correcting distortions associated with bailouts. In my model, I show that adding a liquidity requirement to the policy regime with a cap on early payments can correct the resulting distortions, but may end up making the financial system more fragile.…”

Section: Introductionmentioning

confidence: 99%

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Liquidity Regulation and Financial Stability

2018

Macroecon. Dynam.

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Anticipating a bailout in the event of a crisis distorts financial intermediaries’ incentives in multiple dimensions. Bailout payments can, for example, lead intermediaries to issue too much short-term debt while simultaneously underinvesting in liquid assets. To correct these distortions, policymakers may choose to regulate the composition of both the assets and liabilities of intermediaries. I examine these regulations in a version of the Diamond and Dybvig [(1983). Bank runs, deposit insurance, and liquidity. Journal of Political Economy, 91(3), 401–419] model with limited commitment. I demonstrate that, contrary to common wisdom, introducing a minimum liquidity requirement can increase intermediaries’ susceptibility to a run by their investors.

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Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Liquidity Regulation and Financial Stability

2018

Macroecon. Dynam.

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“…Bianchi and Mendoza, 2010). We make this assumption purposefully to focus on the inefficiency that arises from reallocation of funds between households and firms (see also Jeanne andKorinek (2011) andStavrakeva (2015) for an analysis of bailouts with fire-sale externalities) 9 Christiano, Eichenbaum, and Trabandt (2015) also attribute a primary role to fluctuations in the cost of working capital during the Great Recession.…”

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confidence: 99%

Who Exactly Benefits from Too Big To Fail?

Waller¹

2016

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Banks as patient fixed-income investors

Hanson

Shleifer

Stein

et al. 2015

Journal of Financial Economics

290

115

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We examine the business model of traditional commercial banks when they compete with shadow banks. While both types of intermediaries create safe "money-like" claims, they go about this in different ways. Traditional banks create money-like claims by holding illiquid fixed-income assets to maturity, and they rely on deposit insurance and costly equity capital to support this strategy. This strategy allows bank depositors to remain "sleepy": they do not have to pay attention to transient fluctuations in the market value of bank assets. In contrast, shadow banks create money-like claims by giving their investors an early exit option requiring the rapid liquidation of assets. Thus, traditional banks have a stable source of funding, while shadow banks are subject to runs and fire-sale losses. In equilibrium, traditional banks have a comparative advantage at holding fixed-income assets that have only modest fundamental risk but are illiquid and have substantial transitory price volatility, whereas shadow banks tend to hold relatively liquid assets.JEL classification: G01, G21, G23

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Optimal Bank Regulation and Fiscal Capacity

Cited by 7 publications

References 40 publications

Liquidity Regulation and Financial Stability

Liquidity Regulation and Financial Stability

Who Exactly Benefits from Too Big To Fail?

Banks as patient fixed-income investors

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