How Do Financial Vulnerabilities and Bank Resilience Affect Medium-Term Macroeconomic Tail Risk?

Aikman, David; Bridges, Jonathan; Hoke, Sinem Hacioglu; O'Neill, Cian; Raja, Akash

doi:10.2139/ssrn.3459006

Cited by 8 publications

(13 citation statements)

References 33 publications

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“…This spread is the nearest equivalent in our model to the 'excess bond premium', which Gilchrist and Zakrajšek (2012) found to be a good leading indicator for the risk of a recession in the near term, which we can think of as 'GDP-at-Risk'. Adrian, Boyarchenko, and Giannone (2019) and Aikman et al (2019) suggest that GDP-at-risk can serve as a useful measure of financial instability.) In our model, movements in the spread can be thought of as proxies for the resilience of the banking sector.…”

Section: The Role Of Capital Requirementsmentioning

confidence: 99%

The Macroprudential Toolkit: Effectiveness and Interactions

Millard,

Rubio,

Varadi

2023

Oxf Bull Econ Stat

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We use a DSGE model with financial frictions and with macroprudential limits on both banks and mortgage borrowers, in the form of capital requirements and maximum debt‐service ratios. We then examine: (i) the impact of different combinations of macroprudential limits on key macroeconomic aggregates; (ii) their interaction with each other and with monetary policy; and (iii) their effects on the volatility of key macroeconomic variables and on welfare. We find that capital requirements on banks are the optimal tool when faced with a financial shock, as they nullify the effects of financial frictions and reduce the effects of the shock on the real economy. Instead, limits on mortgage debt‐service ratios are optimal following a housing demand shock, as they disconnect the housing market from the real economy, reducing the volatility of inflation. Hence, no policy on its own is sufficient to deal with a wide range of shocks.

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Section: The Role Of Capital Requirementsmentioning

confidence: 99%

The Macroprudential Toolkit: Effectiveness and Interactions

Millard,

Rubio,

Varadi

2023

Oxf Bull Econ Stat

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“…These institutions were not subject to standard prudential requirements. 6 As a first step, a macroprudential authority would have needed to bring these firms inside the regulatory perimeter. As illustrated in Table 1, bringing all US broker-dealers to the same capital standards that commercial banks had in 2007 would already have added a substantial amount of capital to the system.…”

Section: Tools and Actions To Reduce Leveragementioning

confidence: 99%

“…This is likely to be an overestimate of the scale of appropriate policy intervention because some public provision of liquidity in a crisis is likely to be efficient (Holmström and Tirole 1998). 6 In 2004, the Securities and Exchange had created the voluntary "Consolidated Supervised Entities" program to regulate large investment bank holding companies. However, this regime was primarily intended to satisfy foreign regulators (Financial Crisis Inquiry Commission 2011).…”

Section: Tools and Actions To Reduce Funding Mismatchesmentioning

confidence: 99%

Would Macroprudential Regulation Have Prevented the Last Crisis?

Aikman

Bridges

Kashyap

et al. 2019

Journal of Economic Perspectives

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How well equipped are today’s macroprudential regimes to deal with a rerun of the factors that led to the global financial crisis? To address the factors that made the last crisis so severe, a macroprudential regulator would need to implement policies to tackle vulnerabilities from financial system leverage, fragile funding structures, and the build-up in household indebtedness. We specify and calibrate a package of policy interventions to address these vulnerabilities—policies that include implementing the countercyclical capital buffer, requiring that banks extend the maturity of their funding, and restricting mortgage lending at high loan-to-income multiples. We then assess how well placed are two prominent macroprudential regulators, set up since the crisis, to implement such a package. The US Financial Stability Oversight Council has not been designed to implement such measures and would therefore make little difference were we to experience a rerun of the factors that preceded the last crisis. A macroprudential regulator modeled on the UK’s Financial Policy Committee stands a better chance because it has many of the necessary powers. But it too would face challenges associated with spotting build-ups in risk with sufficient prescience, acting sufficiently aggressively, and maintaining political backing for its actions.

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“…An estimate of the necessary countercyclical capital buffer rate is hence: As of 2005, the 15 TARP recipients on which we focus had total risk-weighted assets of approximately $8.4 trillion-the denominator of the expression above. 4 The average "domestic lending conversion factor" was around 75 percent (Avraham, Selvaggi, and Vickery 2012). That is, because large US banks have substantial global assets, an increase in the US countercyclical capital buffer rate will not pass through onefor-one into their capital requirements.…”

Section: Tools and Actions To Reduce Leveragementioning

confidence: 99%

“…The 15 bank holding companies and broker-dealers that received the largest injections in the Troubled Asset Relief Program (TARP) were Citigroup, Bank of America, JP Morgan Chase, Wells Fargo, Goldman Sachs, Morgan Stanley, PNC Financial Services Group, U.S. Bancorp, SunTrust, Capital One Financial, Regions Financial Corporation, Fifth Third Bancorp, BB&T, Bank of New York Mellon, and Key Corp. The estimates we report in the text do not include capital provided by this program to other, smaller banks 4. This number is estimated using published accounts and an average risk-weight of 67.5 percent (based on the New York Fed Quarterly Trends for Consolidated U.S. Banking Organizations).…”

mentioning

confidence: 99%