Bank risk-taking, small open economy and macroprudential policy
- Autores: Jorge Antonio Pozo Sanchez
- Directores de la Tesis: Andrea Caggese (dir. tes.), Luca Fornaro (codir. tes.)
- Lectura: En la Universitat Pompeu Fabra ( España ) en 2019
- Idioma: español
- Tribunal Calificador de la Tesis: Luca Gambetti (presid.), Davide Debortoli (secret.), Sergi Basco (voc.)
- Materias:
- Texto completo no disponible (Saber más ...)
- Resumen
As emerging economies become more integrated into the international credit markets, their banking systems' dependence on foreign funds becomes more important, which make them more vulnerable to foreign shocks. Considering the large and volatile capital flows to emerging markets economies, it becomes imperative to study the effects of foreign shocks, such as foreign interest rates and access to the international credit market, on the risk-taking behavior of banks. For instance, large credit booms and capital inflows seem to be followed by deep crises. Although there has been a large amount of research into the impact of domestic policy rates on the degree of bank risk-taking, known as the “risk-taking channel”, less attention has been devoted to studying the effects of foreign monetary policy and the access to foreign credit on bank risk-taking. This dissertation aims to study these issues. Therefore, it consists of three essays on bank risk-taking, small open economy and macroprudential policy. Chapter 1 studies the effects of a foreign interest rate reduction on excessive bank risk-taking; Chapter 2 investigates the effects of the intertemporal channel on bank risk-taking's decisions after an unanticipated sudden stop; Chapter 3 studies the role of the real exchange rate on bank risk-taking's decisions after a foreign interest rate decline.
In the first chapter, I develop a two-period open economy model with banks facing foreign borrowing limits. The interaction of banks' limited liability and deposit insurance leads banks into socially excessive risk-taking, which involves credit volume and not the type of credit. This is because the limited liability does not allow banks to internalize the negative profits each time banks default and the deposit insurance avoids interest rates capture bank risk-taking. This in turn leads banks to overestimate the net marginal benefits of loans and so the allocation of bank loans is disrupted. In particular, bank loans become 3.53 inefficiently high. The novel result is that, under a realistic calibration, a 100 basis points (bps) drop in a foreign interest rate reduces banks' default probability by 5 bps and hence diminishes the excessive bank risk-taking. As a result, loans become 3.48 inefficiently high. The intuition is that since foreign borrowing limit binds, the marginal deposit is domestic and hence the marginal cost of loans is unaffected. This means that the lower foreign rate does not boost banks' credit. In addition, for a given loan level the lower rate reduces bank default probability, which diminishes bank excessive risk-taking incentives and hence the overestimation of the net marginal benefits of loans. Consequently, the smaller foreign rate decreases excessive bank loans. In other words, the smaller default probability increases the numbers of times that banks fully honor their obligations and consequently diminishes the overestimation of the marginal benefits of loans. Through the same mechanism, a 100 increase in the access to the international credit markets reduces the default probability by 15 bps and hence diminishes the excessive risk-taking by banks. Thus, loans become 3.38 inefficiently high. In this economy, regulatory capital requirements that limit the amount of bank loans per unit of bank equity restore efficiency. Finally, after either a foreign rate reduction or a higher foreign borrowing limit, less banking regulation is required to restore the socially efficient risk-taking and socially efficient loans.
In the second chapter, I build up a framework to study the dynamics of the default probability of banks and the excess bank risk-taking after a sudden stop in an emerging economy. The novelty result is that compared to the two-period model, discussed in chapter 1, an infinite-period model creates an intertemporal channel that amplifies the long-term excess bank risk-taking and that also amplifies the short-term effect of a sudden stop on excess bank risk-taking. The fact that banks have limited liability and deposit insurance, not only in the present but also in the future, creates incentives to overestimate (from banks' perspective) by even more the expected marginal benefits of banks' loans, which leads to a higher excess bank risk-taking in the long-term. Consequently, if banks know ex-ante that there is going to be a gradual reduction of the foreign borrowing limit of banks, this intertemporal channel creates a stronger short-term positive response of banks' excess risk-taking incentives because they internalize the higher future marginal benefits of loans from increasing the current level of loans. These results were obtained after conducting a qualitative analysis of the model calibrated to Peru. In particular, I calibrate the model to mimic the data of 1998Q3. In the long-term equilibrium (stochastic steady state) bank loans are 5.79 inefficiently high, and the (annualized) default probability of banks, that by construction is 3, is eight times the default probability under a regulated economy. The regulated economy is defined as an economy with a socially optimal policy intervention. However, when abstracting from the intertemporal channel, bank loans are only 0.15 inefficiently high and the default probability is almost the same as in the regulated economy. In addition, I allow for an 87 gradual reduction on foreign borrowing limit faced by banks in order to simulate the sudden stop that hit Peru in 1998. In particular, this gradual reduction aims to mimic the reduction of the short-term net foreign liability of financial system to GDP ratio from 7.5 in 1998Q3 to an average of 1 during 2010. The sudden stop simulation, in the model, accurately predicts the 60 short-term rise in the morosity rate (since 1998Q3 to 1999Q2), through a 60 rise in the bank default probability. It also mimics very well the reduction in bank foreign debt to bank credit ratio from 25 to 5 over the 1998Q3-2006Q4 period.
In the third chapter, I assess the effects of a foreign interest rate reduction on excess bank risk-taking taking into account the general equilibrium effects on the real exchange rates. To do this I develop a two-sector (tradable and nontradable) two-period small open economy model, where nontradable firms face a binding borrowing limit and so nontradable loans are fixed. Calibrated to Peru data, in the model tradable loans are 0.084 inefficiently high, while total loans are 0.027 inefficiently high. I find that after a 100 bps unexpected foreign rate cut, bank default probability moves from 3 to 2.18, which diminishes banks excess risk-taking incentives. The main novel result is that general equilibrium effects on real exchange rate decrease the positive relationship between the foreign interest rate and excess bank risk-taking discussed in chapter 1. The key driver behind this result is that while in the first chapter households' supply of bank deposits is perfectly elastic, in this chapter it responds positively to changes in their returns. Since supply curve of bank deposits has a positive slope, households, that face a smaller excess demand of deposits caused by lower bank incentives to take excess risk, are willing to accept a smaller domestic interest rate. This avoids a stronger reduction in excess bank deposits and thus avoids a stronger reduction in excess tradable loans. As a result, the positive slope of the supply curve of bank deposits diminishes the negative effect on excess bank risk-taking after a foreign rate cut discussed in the first chapter. Quantitatively, the general equilibrium effects on real exchange rate decrease the drop in relative excess tradable loans, after the foreign rate cut, by 130.7 bps and the drop in relative excess total loans by 42 bps. In addition, when controlling for the general equilibrium effects on the real exchange rate, relative excess total loans decrease by 43 bps. This is comparable with a 45 bps reduction in chapter 1 (when adding firms and non-full capital depreciation) having in mind that, in contrast to chapter 1, only a fraction of loans (tradable loans) responds to foreign rate. Results, are qualitatively speaking, robust for realistic calibrations and when the borrowing limit faced by nontradable firms does not bind. In this case, tradable loans are 1.44 inefficiently high and nontradable loans are 0.62 inefficiently low, while total loans are 0.034 inefficiently high. Interestingly, in this case after a low foreign rate, there is a relatively important bank credit reallocation from the tradable to nontradable sector. In particular, tradable loans decrease by 1.17 and nontradable loans increase by 0.51, while total loans decrease by only 0.03. Finally, if the nontradable loan limit binds, taxes on loans demanded by tradable firms or no asset-specific capital requirements restores efficiency, while if the limit does not bind, no asset-specific capital requirements, complemented with taxes on tradable loans (or with subsidies on nontradable loans), or asset-specific capital requirements restore efficiency.
References:
Akinci, O., Queralto, A., (2014), Banks, Capital Flows and Financial Crisis, International Finance Discussion Papers, No 1121, Board of Governors of the Federal Reserve System.
Begenau, J., (2019), Capital Requirements, Risk Choice, and Liquidity Provision in a Business Cycle Model, Journal of Financial Economics, forthcoming.
Begenau, J., Landvoigt, T., (2017), Financial Regulation in a Quantitative Model of the Modern Banking System, Working paper No. 3558.
Benigno G., Converse, N., Fornaro, L., (2015), Large capital inflows, sector allocation, and economic performance, Journal of International Money and Finance, 55, 60-87.
Benigno G., and Luca Fornaro, 2012, Reserve Accumulation, Growth and Financial Crises, CEP Discussion Paper No 1161.
Benigno G., Chen, H., Otrok, C., Rebucci, A., Young, E. R., (2013), Financial crises and macroprudential policies, Journal of International Economics, 89, 453-470.
Benigno, G., Chen, H., Otrok, C., Rebucci, A., Young, E. R., (2016), Optimal capital controls and real exchange rate policies: A pecuniary externality perspective, Journal of Monetary Economics, 84, 147-165.
Bernanke, B., Gertler, M., Gilchrist, S., (1999), The financial accelerator in a quantitative business cycle framework, Handbook of Macroeconomics, in: Taylor, J. B., \& Woodford, M., (ed.), edition 1, volume 1, chapter 21, 1341-1393.
Bianchi, J., (2011), Overborrowing and Systemic Externalities in the Business Cycle, American Economic Review, 101 (7), 3400-3426.
Borio, C., Zhu, H., (2012), Capital regulation, risk-taking and monetary policy: A missing link in the transmission mechanism?, Journal of Financial Stability, 8, 236-251.
Brzoza-Brzezina, M., M. Kolasa, and K. Makarski. 2013. Macroprudential Policy and Imbalances in the Euro Area. Working Paper No. 138, National Bank of Poland.
Bruno V., Shin, H.S., (2015), Capital Flows and the risk-taking channel of monetary policy, Journal of Monetary Economics, 71, 119-132.
Caballero, R. J., Krishnamurthy, A., (2001), International and domestic collateral constraints in a model of emerging market crises, Journal of Monetary Economics, 48, 513-548.
Caballero, J. A., (2014), Do surges in international capital inflows influence the likelihood of banking crises?, The Economic Journal, 126, 281-316.
Cespedes, L., R. Chang and A. Velasco, 2015, Financial Intermediation, Exchange Rates, and Unconventional Policy in an Open Economy, manuscript.
Cespedes, L. F., Chang R., Velasco, A., (2004), Balance Sheets and Exchange Rate Policy, American Economic Review, 94(4), 1183-1193.
Cociuba, S., Shukayev, M., Ueberfeldt, A., (2011), Financial intermediation, risk taking and monetary policy, Working Paper.
Collard, F., Dellas, h., Diba, B., Loisel, O., (2017), Optimal Monetary and Prudential Policy, American Economic Journal: Macroeconomics, 9(1) 40-87.
Darracq, M., kok, C., Rodriguez-Palenzuela, D., (2011), Macroeconomic Propagation under Different Regulatory Regimes: Evidence from an Estimated DSGE Model for the Euro Area, International Journal of Central Banking, 7(4), 49-113.
De Nicolo, G., P. Honohan, and A. Ize, 2005, Dollarization of the Bank Deposits: Causes and Consequences, Journal of Banking and Finance, 29, 1697-727.
De Nicolo, G., Dell?Ariccia, G., Laeven, L., Valencia, F., 2010, Monetary policy and bank risk-taking. IMF Working Paper.
Dell'Ariccia, G., Laeven, L., Marquez, R., (2014), Real interest rates, leverage, and bank risk-taking, Journal of Economic Theory, 149(1), 65-99.
Dell'Ariccia, G., Laeven, L., Suarez, G. A., (2016), Bank Leverage and Monetary Policy's Risk-Taking Channel: Evidence from the United States, The Journal of Finance, 72(2), 613-654.
Fornaro, Luca, 2015, Financial crises and exchange rate policy, Journal of International Economics 95, 202-215.
Gertler, Mark, and Nobuhiro Kiyotaki. 2011. Financial Intermediation and Credit Policy in Business Cycle Analysis, In Handbook of Monetary Economics, Vol 3A, edited by Benjamin M. Friedman and Michael Woodford, 547-99. Amsterdam: Elsevier Science.
Fornaro, L., (2015), Financial crises and exchange rate policy, Journal of International Economics, 95, 202-215.
Fornaro, L., (2018), International Debt Deleveraging, Journal of European Economic Association, 16(5), 1394-1432.
Gertler, M., Kiyotaki, N., (2015), Banking Liquidity, and Bank Runs in an Infinite Horizon Economy, American Economic Review, 105(7), 2011-2043.
Gertler, M., Kiyotaki N., Queralto, A., (2012), Financial crises, bank risk exposure, and government financial policy, Journal of Monetary Economics, 59, S17-S34.
Jim\'enez, G., Ongena, S., Peydr\'o, J. L., Saurina, J., (2014), Hazardous Time for Monetary Policy: What do Twenty-three Milllon Bank Loans say about the effect of Monetary Policy on Credit Risk-taking?, Econometrica, 82(2) 463-505.
Kiyotaki, N., Moore, J., (1997), Credit Cycles, Journal of Political Economy, 105, 211-248.
Mendoza, E. G., 2010, Sudden Stops, Financial Crises, and Leverage, American Economic Review, 100, 1941-1966.
Nguyen, T. T., (2015), Bank Capital Requirements: A Quantitative Analysis, Fisher College of Business, WP 2015-03-14.
