Credit Risk Transfers and the Macroeconomy

  • Ester Faia
  • Published 2011

Abstract

The recent .nancial crisis has highlighted the limits of the “originate to distribute“ model of banking, but its nexus with the macroeconomy and monetary policy remains unexplored. I build a DSGE model with banks (along the lines of Holmström and Tirole [28] and Parlour and Plantin [39]) and examine its properties with and without active secondary markets for credit risk transfer. The possibility of transferring credit reduces the impact of liquidity shocks on bank balance sheets, but also reduces the bank incentive to monitor. As a result, secondary markets allow to release bank capital and exacerbate the effect of productivity and other macroeconomic shocks on output and in.ation. By offering a possibility of capital recycling and by reducing bank monitoring, secondary credit markets in general equilibrium allow banks to take on more risk. Keywords: credit risk transfer, dual moral hazard, monetary policy, liquidity, welfare. JEL classification: E3, E5, G3. Kiel Institute for the World Economy & Goethe University Frankfurt & CEPREMAP House of Finance Grüneburgplatz 1 60323, Frankfurt a. M. E-mail: faia@wiwi.uni-frankfurt.de *I gratefully acknowledge financial support from the Lamfalussy award of the European Central Bank. Ignazio Angeloni provided useful suggestions on an earlier draft. I thank participants at the: ECB conference on “The bank lending channel: new models and empirical analysis“, Society for Computational Economics 2010 in London and at the macro seminar at Georgetown University. yCorrespondence to: Department of Money and Macro, Goethe University Frankfurt, House of Finance, office 3.47, Grueneburgplatz 1, 60323, Frankfurt am Main, Germany. E-mail: faia@wiwi.uni-frankfurt.de. Webpage: www.wiwi.uni-frankfurt.de/profs/faia. ____________________________________ The responsibility for the contents of the working papers rests with the author, not the Institute. Since working papers are of a preliminary nature, it may be useful to contact the author of a particular working paper about results or caveats before referring to, or quoting, a paper. Any comments on working papers should be sent directly to the author. Coverphoto: uni_com on photocase.com Credit Risk Transfers and the Macroeconomy Ester Faia Frankfurt University, Kiel IfW and CEPREMAPy Firs draft: December 2009. This draft: September 2010. Abstract The recent …nancial crisis has highlighted the limits of the "originate to distribute" model of banking, but its nexus with the macroeconomy and monetary policy remains unexplored. I build a DSGE model with banks (along the lines of Holmström and Tirole [28] and Parlour and Plantin [39]) and examine its properties with and without active secondary markets for credit risk transfer. The possibility of transferring credit reduces the impact of liquidity shocks on bank balance sheets, but also reduces the bank incentive to monitor. As a result, secondary markets allow to release bank capital and exacerbate the e¤ect of productivity and other macroeconomic shocks on output and in‡ation. By o¤ering a possibility of capital recycling and by reducing bank monitoring, secondary credit markets in general equilibrium allow banks to take on more risk. Keywords: credit risk transfer, dual moral hazard, monetary policy, liquidity, welfare. JEL classi…cation: E3, E5, G3 . I gratefully acknowledge …nancial support from the Lamfalussy award of the European Central Bank. Ignazio Angeloni provided useful suggestions on an earlier draft. I thank participants at the: ECB conference on "The bank lending channel: new models and empirical analysis", Society for Computational Economics 2010 in London and at the macro seminar at Georgetown University. yCorrespondence to: Department of Money and Macro, Goethe University Frankfurt, House of Finance, o¢ ce 3.47, Grueneburgplatz 1, 60323, Frankfurt am Main, Germany. E-mail: faia@wiwi.uni-frankfurt.de. Webpage: www.wiwi.uni-frankfurt.de/profs/faia.The recent …nancial crisis has highlighted the limits of the "originate to distribute" model of banking, but its nexus with the macroeconomy and monetary policy remains unexplored. I build a DSGE model with banks (along the lines of Holmström and Tirole [28] and Parlour and Plantin [39]) and examine its properties with and without active secondary markets for credit risk transfer. The possibility of transferring credit reduces the impact of liquidity shocks on bank balance sheets, but also reduces the bank incentive to monitor. As a result, secondary markets allow to release bank capital and exacerbate the e¤ect of productivity and other macroeconomic shocks on output and in‡ation. By o¤ering a possibility of capital recycling and by reducing bank monitoring, secondary credit markets in general equilibrium allow banks to take on more risk. Keywords: credit risk transfer, dual moral hazard, monetary policy, liquidity, welfare. JEL classi…cation: E3, E5, G3 . I gratefully acknowledge …nancial support from the Lamfalussy award of the European Central Bank. Ignazio Angeloni provided useful suggestions on an earlier draft. I thank participants at the: ECB conference on "The bank lending channel: new models and empirical analysis", Society for Computational Economics 2010 in London and at the macro seminar at Georgetown University. yCorrespondence to: Department of Money and Macro, Goethe University Frankfurt, House of Finance, o¢ ce 3.47, Grueneburgplatz 1, 60323, Frankfurt am Main, Germany. E-mail: faia@wiwi.uni-frankfurt.de. Webpage: www.wiwi.uni-frankfurt.de/profs/faia.

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Cite this paper

@inproceedings{Faia2011CreditRT, title={Credit Risk Transfers and the Macroeconomy}, author={Ester Faia}, year={2011} }