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Financial Crises and Transmission of Shocks

Paper Session

Sunday, Jan. 7, 2018 10:15 AM - 12:15 PM

Loews Philadelphia, Regency Ballroom C1
Hosted By: American Finance Association
  • Chair: Tyler Muir, University of California-Los Angeles

Asset Price Bubbles and Systemic Risk

Markus K. Brunnermeier
,
Princeton University
Simon Rother
,
University of Bonn
Isabel Schnabel
,
University of Bonn

Abstract

This paper documents that asset price bubbles go along with elevated systemic risk using data from 17 OECD countries over almost 30 years. This relationship can emerge already in the boom phase of the bubble and is strong for both stock market as well as real estate bubbles. Importantly, interaction terms with bank characteristics (loan growth, size, leverage, and maturity mismatch) show that this link is more pronounced for banks with higher loan growth and larger size. Moreover, larger bubbles are associated with higher systemic risk, while the findings with respect to the length of a bubble episode are mixed.

Whatever it Takes: The Real Effects of Unconventional Monetary Policy

Viral Acharya
,
New York University, CEPR, and NBER
Tim Eisert
,
Erasmus University Rotterdam
Christian Eufinger
,
IESE Business School
Christian Hirsch
,
Goethe University Frankfurt

Abstract

Launched in Summer 2012, the European Central Bank (ECB)'s Outright Monetary Transactions (OMT) program indirectly recapitalized European banks through its positive impact on periphery sovereign bonds. However, the stability reestablished in the banking sector did not fully translate into economic growth. We document zombie lending by banks that remained undercapitalized even post-OMT. In turn, firms receiving loans used these funds not to undertake real economic activity such as employment and investment but to build up cash reserves. Creditworthy firms in industries with a high zombie firm prevalence suffered significantly from this credit misallocation, which further slowed down the economic recovery.

Cross-border Bank Flows and Systemic Risk

Andrew Karolyi
,
Cornell University
John Sedunov
,
Villanova University
Alvaro Taboada
,
Mississippi State University

Abstract

Using data on cross-border bank flows from Bank for International Settlement (BIS) reporting source countries to 114 recipient countries, we find that heightened bank flows are associated with lower systemic risk in the bank systems in the recipient country. The link between increased flows and reductions in marginal expected shortfall (MES) are concentrated among banks that are larger, profitable, and more efficient. The decline in MES is concentrated among banks in developed markets and those in countries with banking sectors that are larger and have lower capital bases. Additional evidence helps to identify the channels through which cross-border bank flows help to reduce MES, which is by improving recipient-country bank asset quality, efficiency, and profitability. Overall, our findings are consistent with dynamic models of multinational banking that predict lower risk-taking by stimulating local competition and suggest a positive impact of international bank flows on global financial stability.
Discussant(s)
Alan Moreira
,
Yale University
Marco Di Maggio
,
Harvard Business School & NBER
Yao Zeng
,
University of Washington
JEL Classifications
  • G2 - Financial Institutions and Services