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Funding Financial Intermediaries

Paper Session

Saturday, Jan. 4, 2020 2:30 PM - 4:30 PM (PDT)

Marriott Marquis, Grand Ballroom 12
Hosted By: American Economic Association
  • Chair: Jose Scheinkman, Columbia University

Microevidence from a Systemwide Financial Meltdown: The German Crisis of 1931

Kristian Blickle
,
Federal Reserve Bank of New York
Markus Brunnermeier
,
Princeton University
Stephan Luck
,
Federal Reserve Bank of New York

Abstract

In this paper, we use hand-collected monthly bank balance sheet data during a system-wide run on the German banking system in 1931 to study the determinants of bank stability. We derive three key insights. First, demand deposits are — despite the absence of deposit insurance — largely stable and the run is centered around the collapse of interbank and wholesale funding. Second, while aggregate deposits are contracting, deposits are also partially reshuffled within the system with some banks receiving deposit inflows during the run. Third, we show that both, better capitalized and more liquid banks, are more stable and less likely to be subject to deposit outflows during the run. However, only higher bank capital is associated with higher credit provision in the crisis.

Optimal Deposit Insurance

Eduardo Davila
,
Yale University
Itay Goldstein
,
University of Pennsylvania

Abstract

This paper studies the optimal determination of deposit insurance (DI) when bank runs are possible. In a variety of environments, the welfare impact of changes in the level of deposit insurance coverage exclusively depends on three sufficient statistics: the sensitivity of the likelihood of bank failure with respect to the level of DI, the utility gain induced by preventing the marginal bank failure, which can be expressed in terms of the drop in depositors' consumption, and the direct social cost of intervention in bank failure scenarios, which can be expressed in terms of the probability of bank failure, the marginal cost of public funds, and the mass of partially insured depositors. The same expression applies a) when banks face perfect ex-ante regulation and b) when banks are not allowed to react to policy changes. Under imperfect regulation, because banks do not internalize the fiscal impact of their actions, changes in the behavior of banks induced by varying the level of DI (often referred to as moral hazard) only affect the level of optimal DI directly through a fiscal externality, but not independently. We characterize the wedges that determine the optimal ex-ante regulation, which can be mapped to liability-side regulation (e.g., deposit insurance premia) and asset-side regulation. Finally, we explore the quantitative implications of our framework through a direct measurement exercise and a model simulation.

Going-Concern Debt of Financial Intermediaries

Yueran Ma
,
University of Chicago
Jose Scheinkman
,
Columbia University

Abstract

We study asset composition and debt composition of US financial intermediaries, in particular bank holding companies. We find that the collateral value of discrete assets accounts for about 60% of total assets in aggregate, and the share is larger among small institutions. Meanwhile, capital market debt against firm going-concern value accounts for around 10% to 15% of total assets in aggregate, about the same as debt against discrete assets, and the share is smaller among small institutions. Financial institutions, especially large institutions, are not just about holding discrete collateralizable assets; services and going-concern value are important, and debt against going-concern value is prevalent. We also find that financial institutions' debt against going-concern value has weak monitoring, relative to similar types of debt of comparable non-financial firms.
Discussant(s)
Matthieu Gomez
,
Columbia University
Douglas Diamond
,
University of Chicago
Martin Oehmke
,
London School of Economics and Political Science
JEL Classifications
  • G2 - Financial Institutions and Services
  • G3 - Corporate Finance and Governance