« Back to Results
Pennsylvania Convention Center, 105-A
Hosted By:
American Economic Association
likely to cut credit to non-viable firms. (ii)\ Credit misallocation increased the failure rate of healthy firms and reduced the failure rate of non viable firms. (iii) Nevertheless, the adverse effects of credit misallocation on the growth rate of healthier firms were negligible, and so were the effects on TFP dispersion. This goes against previous influential findings that, we argue, face serious identification problems. Thus, while banks with low capital can be an important source of aggregate inefficiency in the long run, their contribution to the severity of the great recession via capital misallocation was modest.
of incentive problems, these flows are constrained and collateral is needed. The com-
position of collateral matters. The use of inside collateral, such as loans, creates a "collateral
pyramid", in that cash flows from one loan are pledged to secure another. Outside collateral,
such as treasuries, serves as a foundation of, and stabilizes, the pyramid. Through collateral
pyramids the financial sector can sustain a large volume of reallocation across banks, but
at the cost of systemic panics. During panics, the safe asset creation process stalls, the
pyramid collapses, collateral becomes scarce. The exposure to these panics depends on the
composition of collateral: all else the same, markets are more fragile when loans are secured
by inside collateral
Credit Allocation
Paper Session
Friday, Jan. 5, 2018 8:00 AM - 10:00 AM
- Chair: Robert Rich, Federal Reserve Bank of New York
Credit Misallocation During the European Financial Crisis
Abstract
Do banks with low capital extend excessive credit to weak firms, and does this matter for aggregate efficiency? Using a unique data set that covers almost all bank-firm relationships in Italy in the period 2004-2013, we find that, during the Eurozone financial crisis: (i) Under-capitalized banks were lesslikely to cut credit to non-viable firms. (ii)\ Credit misallocation increased the failure rate of healthy firms and reduced the failure rate of non viable firms. (iii) Nevertheless, the adverse effects of credit misallocation on the growth rate of healthier firms were negligible, and so were the effects on TFP dispersion. This goes against previous influential findings that, we argue, face serious identification problems. Thus, while banks with low capital can be an important source of aggregate inefficiency in the long run, their contribution to the severity of the great recession via capital misallocation was modest.
The Collateral Composition Channel
Abstract
Wholesale financial markets help reallocate deposits across heterogeneous banks. Becauseof incentive problems, these flows are constrained and collateral is needed. The com-
position of collateral matters. The use of inside collateral, such as loans, creates a "collateral
pyramid", in that cash flows from one loan are pledged to secure another. Outside collateral,
such as treasuries, serves as a foundation of, and stabilizes, the pyramid. Through collateral
pyramids the financial sector can sustain a large volume of reallocation across banks, but
at the cost of systemic panics. During panics, the safe asset creation process stalls, the
pyramid collapses, collateral becomes scarce. The exposure to these panics depends on the
composition of collateral: all else the same, markets are more fragile when loans are secured
by inside collateral
Banking Competition and Shrouded Attributes: Evidence From the United States Mortgage Market
Abstract
We document that banking deregulation increases competition, increased competition leads banks to offer lower initial rate on adjustable-rate mortgages (ARMs) to attract borrowers, but they also shroud these contracts by designing them with back-loaded resetting rates. Shrouding helps banks to offset about 73% of their losses from price discount due to competition. Deregulation increases the proportion of naïve borrowers, and banks shroud more where there is higher proportion of naïve borrowers. These results support the theory that sophisticated firms can exploit consumer biases by designing exploitative contracts. Although competition reduces firm revenues and benefits consumers initially, the overall effect is mitigated by the banks shrouding strategy.JEL Classifications
- G2 - Financial Institutions and Services