This website uses cookies.

By clicking the "Accept" button or continuing to browse our site, you agree to first-party and session-only cookies being stored on your device to enhance site navigation and analyze site performance and traffic. For more information on our use of cookies, please see our Privacy Policy.

« Back to Results

Financial Stability

Paper Session

Saturday, Jan. 4, 2020 10:15 AM - 12:15 PM (PDT)

Manchester Grand Hyatt, Seaport F
Hosted By: American Finance Association
  • Chair: Stacey Schreft, U.S. Office of Financial Research

The Anatomy of the Transmission of Macroprudential Policies

Viral Acharya
,
Reserve Bank of India, CEPR, and NBER
Katharina Bergant
,
Trinity College Dublin
Matteo Crosignani
,
University of Michigan
Tim Eisert
,
Erasmus University Rotterdam
Fergal McCann
,
Central Bank of Ireland

Abstract

We analyze the effect of regulatory limits on household leverage on residential mortgage credit and house prices. Combining supervisory loan level and house price data, we examine the introduction of loan-to-income and loan-to-value limits on residential mortgages in Ireland. Mortgage credit is reallocated from low- to high-income borrowers and away from "hot" housing markets, typically urban areas, cooling down, in turn, real estate prices. Consistent with a bank portfolio choice channel, more-affected banks drive this reallocation and increase their risk-taking in their securities holdings and corporate credit, two asset classes not targeted by the policy.

Banks as Regulated Traders

Antonio Falato
,
Federal Reserve Board
Diana Iercosan
,
Federal Reserve Board
Filip Zikes
,
Federal Reserve Board

Abstract

Banks use trading as a vehicle to take risk. Using unique high-frequency regulatory data, we estimate the sensitivity of weekly bank trading profits to aggregate equity, fixed-income, credit, currency and commodity risk factors. U.S. banks had large trading exposures to equity market risk before the Volcker Rule, which they curtailed afterwards. They also have exposures to credit and currency risk. The results hold up in a quasi-natural experimental design that exploits the phased-in introduction of reporting requirements to address identification. Timing, heterogeneity, and placebo tests further corroborate the results. Counterfactual and stress-test analyses quantify the financial stability implications.

Systemic Portfolio Diversification

Agostino Capponi
,
Columbia University
Marko Weber
,
Columbia University

Abstract

We study the implications of re-sale externalities on balance sheet composition. Banks select their asset holdings to minimize expected execution costs triggered by the need to comply with regulatory leverage requirements. We show that if banks disregard the price impact caused by other banks' liquidation actions, they hold an excessively diversified portfolio. Banks seek systemic diversification when they account for the negative externalities imposed by other banks' liquidation actions. Social costs can be reduced by a tax on portfolio overlap, or by enforcing policies which mandate the split of a bank into smaller institutions with heterogeneous leverage ratios.
Discussant(s)
Tomasz Piskorski
,
Columbia University
Mark Flannery
,
University of Florida
Selman Erol
,
Carnegie Mellon University
JEL Classifications
  • G2 - Financial Institutions and Services