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Creator: Atkeson, Andrew, Eisfeldt, Andrea L., Weill, Pierre-Olivier, and d'Avernas, Adrien Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 567 Abstract:
Banks' ratio of the market value to book value of their equity was close to 1 until the 1990s, then more than doubled during the 1996-2007 period, and fell again to values close to 1 after the 2008 financial crisis. Sarin and Summers (2016) and Chousakos and Gorton (2017) argue that the drop in banks' market-to-book ratio since the crisis is due to a loss in bank franchise value or profitability. In this paper we argue that banks' market-to-book ratio is the sum of two components: franchise value and the value of government guarantees. We empirically decompose the ratio between these two components and find that a large portion of the variation in this ratio over time is due to changes in the value of government guarantees.
Mot-clé: Bank valuation, Bank leverage, Risk shifting, Bank financial soundness, Banking, and Bank regulation Assujettir: H12 - Crisis Management, G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill, E44 - Financial Markets and the Macroeconomy, G38 - Corporate Finance and Governance: Government Policy and Regulation, G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages, and G28 - Financial Institutions and Services: Government Policy and Regulation
Creator: Lagos, Ricardo and Rocheteau, Guillaume Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 375 Abstract:
We investigate how trading frictions in asset markets affect portfolio choices, asset prices and efficiency. We generalize the search-theoretic model of financial intermediation of Duffie, Gârleanu and Pedersen (2005) to allow for more general preferences and idiosyncratic shock structure, unrestricted portfolio choices, aggregate uncertainty and entry of dealers. With a fixed measure of dealers, we show that a steady-state equilibrium exists and is unique, and provide a condition on preferences under which a reduction in trading frictions leads to an increase in the price of the asset. We also analyze the effects of trading frictions on bid-ask spreads, trade volume and the volatility of asset prices, and find that the asset allocation is constrained-inefficient unless investors have all the bargaining power in bilateral negotiations with dealers. We show that the dealers’ entry decision introduces a feedback that can give rise to multiple equilibria, and that free-entry equilibria are generically inefficient.
Mot-clé: Execution delay, Liquidity, Search, Asset prices, Trade volume, and Bid-ask spread Assujettir: G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages, G11 - Portfolio Choice; Investment Decisions, and G12 - Asset Pricing; Trading Volume; Bond Interest Rates
Creator: Perri, Fabrizio and Stefanidis, Georgios Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 554 Abstract:
We use balance sheet data and stock market data for the major U.S. banking institutions during and after the 2007-8 financial crisis to estimate the magnitude of the losses experienced by these institutions because of the crisis. We then use these estimates to assess the impact of the crisis under alternative, and higher, capital requirements. We find that substantially higher capital requirements (in the 20% to 30% range) would have substantially reduced the vulnerability of these financial institutions, and consequently they would have significantly reduced the need of a public bailout.
Mot-clé: Financial crises and Too big to fail Assujettir: G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages and G01 - Financial Crises
Creator: Ales, Laurence, Carapella, Francesca, Maziero, Pricila, and Weber, Warren E. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 641 Abstract:
Prior to 1863, state-chartered banks in the United States issued notes–dollar-denominated promises to pay specie to the bearer on demand. Although these notes circulated at par locally, they usually were quoted at a discount outside the local area. These discounts varied by both the location of the bank and the location where the discount was being quoted. Further, these discounts were asymmetric across locations, meaning that the discounts quoted in location A on the notes of banks in location B generally differed from the discounts quoted in location B on the notes of banks in location A. Also, discounts generally increased when banks suspended payments on their notes. In this paper we construct a random matching model to qualitatively match these facts about banknote discounts. To attempt to account for locational differences, the model has agents that come from two distinct locations. Each location also has bankers that can issue notes. Banknotes are accepted in exchange because banks are required to produce when a banknote is presented for redemption and their past actions are public information. Overall, the model delivers predictions consistent with the behavior of discounts.
Mot-clé: Banknotes, Random matching, and Banks Assujettir: G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages, N21 - Economic History: Financial Markets and Institutions: U.S.; Canada: Pre-1913, and E50 - Monetary Policy, Central Banking, and the Supply of Money and Credit: General
Creator: Boyd, John H. and Smith, Bruce D. (Bruce David), 1954-2002 Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 537 Abstract:
We consider an environment in which risk-neutral firms must obtain external finance. They have access to two kinds of linear, stochastic investment opportunities. For one, return realizations are costlessly observed by all agents. For the other, return realizations are costlessly observed only by the investing firm; however, they can be (privately) observed by outsiders who bear a fixed verification cost. Thus, the second investment opportunity is subject to a standard costly state verification (CSV) problem of the type considered by Townsend (1979), Gale and Hellwig (1985), or Williamson (1986, 1987).
We examine the optimal allocations of investment between the two kinds of projects, as well as the optimal contract used to finance it. We show that the optimal contractual outcome can be supported by having firms issue appropriate (and determinate) quantities of debt and equity securities to outside investors.
The optimal debt-equity ratio necessarily depends (in part) on the firm’s asset structure. Investments in projects subject to CSV problems are associated (in a sense to be made precise) with the use of debt—as might be expected from the existing CSV literature. Investments in projects with publicly observable returns are associated with the use of external equity.
We examine in detail the relationship between the optimal asset and liability structure of the firm. We also describe conditions under which an increase in the cost of state verification shifts the composition of investment towards projects with observable returns, and reduces the optimal debt-equity ratio. Interestingly, the optimal debt-equity ratio is also shown to depend on factors that are irrelevant to asset allocations.
Finally, a large part of the interest in CSV environments has been due to the fact that they may result in equilibrium credit rationing. Our analysis has strong implications for the possibility of equilibrium credit rationing in more general CSV models.
Assujettir: E51 - Money Supply; Credit; Money Multipliers and G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages
Creator: Green, Edward J. and Lin, Ping Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 576 Abstract:
In a finite-trader version of the Diamond-Dybvig (1983) model, the symmetric, ex-ante efficient allocation is implementable by a direct mechanism (i.e., each trader announces the type of his own ex-post preference) in which truthful revelation is the strictly dominant strategy for each trader. When the model is modified by formalizing the sequential-service constraint (cf. Wallace, 1988), the truth-telling equilibrium implements the symmetric, ex-ante efficient allocation with respect to iterated elimination of strictly dominated strategies.
Mot-clé: Implementation, Financial intermediation, and Bank run Assujettir: G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages and D82 - Asymmetric and Private Information; Mechanism Design
Creator: Boyd, John H., Chang, Chun, and Smith, Bruce D. (Bruce David), 1954-2002 Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 593 Abstract:
This paper undertakes a simple general equilibrium analysis of the consequences of deposit insurance programs, the way in which they are priced and the way in which they fund revenue shortfalls. We show that the central issue is how the government will make up any FDIC losses. Under one scheme for making up the losses, we show that FDIC policy is irrelevant: it does not matter what premium is charged, nor does it matter how big FDIC losses are. Under another scheme, all that matters is the magnitude of the losses. And there is no presumption that small losses are “good.” We also show that multiple equilibria can be observed and Pareto ranked. Some economies may be “trapped” in equilibria with inefficient financial systems. Our analysis provides counterexamples to the following propositions. (1) Actuarially fair pricing of deposit insurance is always desirable. (2) Implicit FDIC subsidization of banks through deposit insurance is always undesirable. (3) “Large” FDIC losses are necessarily symptomatic of a poorly designed deposit insurance system.
Mot-clé: Deposit insurance Assujettir: G18 - General Financial Markets: Government Policy and Regulation, G00 - Financial Economics: General, and G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages
Creator: Afonso, Gara and Lagos, Ricardo Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 708 Abstract:
We use minute-by-minute daily transaction-level payments data to document the cross-sectional and time-series behavior of the estimated prices and quantities negotiated by commercial banks in the fed funds market. We study the frequency and volume of trade, the size distribution of loans, the distribution of bilateral fed funds rates, and the intraday dynamics of the reserve balances held by commercial banks. We find evidence of the importance of the liquidity provision achieved by commercial banks that act as de facto intermediaries of fed funds.
Mot-clé: Federal funds rates, Monetary policy, and Federal funds market Assujettir: E44 - Financial Markets and the Macroeconomy, G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages, and E42 - Monetary Systems; Standards; Regimes; Government and the Monetary System; Payment Systems
Creator: Bocola, Luigi Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 722 Abstract:
This paper examines the macroeconomic implications of sovereign credit risk in a business cycle model where banks are exposed to domestic government debt. The news of a future sovereign default hampers financial intermediation. First, it tightens the funding constraints of banks, reducing their available resources to finance firms (liquidity channel). Second, it generates a precautionary motive for banks to deleverage (risk channel). I estimate the model using Italian data, finding that i) sovereign credit risk was recessionary and that ii) the risk channel was sizable. I then use the model to evaluate the effects of subsidized long term loans to banks, calibrated to the ECB’s longer-term refinancing operations. The presence of strong precautionary motives at the time of policy enactment implies that bank lending to firms is not very sensitive to these credit market interventions.
Mot-clé: Credit policies, Financial constraints, and Sovereign debt crises Assujettir: E44 - Financial Markets and the Macroeconomy, G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages, E32 - Business Fluctuations; Cycles, and G01 - Financial Crises
Creator: Boyd, John H. and Graham, Stanley L. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 398 Abstract:
This study estimates the effects of allowing bank holding companies (BHCs) to enter several lines of financial business not now permitted. A simulation technique is used to estimate the risk and return of hypothetical financial corporations after merger between a BHC and a large firm in each of these industries: securities, real estate, life insurance, property and casualty insurance, and insurance agencies. The study concludes that a merger between a BHC and a life insurance company may decrease the probability of bankruptcy for the merged firm relative to the BHC alone. This result does not hold true, however, for BHC mergers with firms in the other industries. In particular, BHC mergers with securities or real estate firms are found to increase the probability of bankruptcy.
Mot-clé: Merger, Bank holding companies, Insurance, Real estate, Bankruptcy, Securities, Risk, and Bank holding company Assujettir: G28 - Financial Institutions and Services: Government Policy and Regulation, G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill, and G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages