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Macroeconomics Research Workshop: Banks Interconnectivity and Leverage

Dates:
  • Fri 01 Dec 2017 11.00 - 12.30
  Add to Calendar 2017-12-01 11:00 2017-12-01 12:30 Europe/Paris Macroeconomics Research Workshop: Banks Interconnectivity and Leverage

ABSTRACT: In the period that preceded the 2008 crisis, US financial intermediaries have become more leveraged (measured as the ratio of assets over equity) and interconnected (measured as the share of liabilities held by other financial intermediaries). This upward trend in leverage and interconnectivity sharply reversed after the crisis. To understand this dynamic pattern we develop a model where banks make risky investments in the non-financial sector and sell part of their investments to other financial institutions (diversification). The model predicts a positive correlation between leverage and interconnectivity which we explore empirically using balance sheet data for over 14,000 financial intermediaries in 32 OECD countries. We enrich the theoretical model by allowing for Bayesian learning about the likelihood of a bank crisis (aggregate risk) and show that the model can generate the dynamics of leverage and interconnectivity observed in the data.
Co-authors : Alessandro Barattieri, Laura Moretti

Seminar Room,3rd Floor,V. la Fonte DD/MM/YYYY
  Seminar Room,3rd Floor,V. la Fonte

ABSTRACT: In the period that preceded the 2008 crisis, US financial intermediaries have become more leveraged (measured as the ratio of assets over equity) and interconnected (measured as the share of liabilities held by other financial intermediaries). This upward trend in leverage and interconnectivity sharply reversed after the crisis. To understand this dynamic pattern we develop a model where banks make risky investments in the non-financial sector and sell part of their investments to other financial institutions (diversification). The model predicts a positive correlation between leverage and interconnectivity which we explore empirically using balance sheet data for over 14,000 financial intermediaries in 32 OECD countries. We enrich the theoretical model by allowing for Bayesian learning about the likelihood of a bank crisis (aggregate risk) and show that the model can generate the dynamics of leverage and interconnectivity observed in the data.
Co-authors : Alessandro Barattieri, Laura Moretti


Location:
Seminar Room,3rd Floor,V. la Fonte

Affiliation:
Department of Economics
Robert Schuman Centre for Advanced Studies

Type:
Workshop

Speaker:
Prof. Vincenzo Quadrini (University of Southern California)
 
 

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