2009 Lamfalussy Fellows

The 2009 Lamfalussy fellows are:

 

Ethan Cohen-Cole, Assistant Professor, University of Maryland

Research project: Integrated financial systems, regulation and new monetary policy

The goal of this research is to study two prominent features of the financial crisis and their impact on the banking sector and the macroeconomy: a failure of the financial system to measure and price risks correctly and the fact that the collapse in asset prices led to widespread problems in consumer demand and bank balance sheets. While the first feature led to greater-than-expected credit losses in the financial sector, the second led to large portfolio write-downs. This had a profound impact on the lending activity of banks. The proposed framework will include both a fully-specified banking sector as well as systematic shocks to asset prices in a dynamic stochastic general equilibrium (DSGE) model. By joining these two, both the independent impact of shocks to the banking sector on the economy as well as the role of these shocks on the transmission mechanism of monetary policy will be analysed. The project is expected to shed light on the interplay of systemic risk, bank regulation and monetary policy and provide a calibration of the model that fits the model to US and European data. It falls under the ECB-CFS network priority ‘Financial systems as risk managers, risk distributors and risk creators’, and also provides an analysis of the financial crisis, some aspects of macro-prudential regulation and the relationship between financial stability and monetary policy.

 

 

Ester Faia, Professor, Goethe University Frankfurt

Research project: Originate-to-distribute model of banking, cross border trading in ABS and monetary policy

The project aims at combining the current finance literature formalising the originate-to-distribute model with the macro literature in order to assess the impact of securitisation for systemic risks and the relation with the monetary policy. The goal is to build an open economy DSGE model with a banking sector engaged in a securitisation activity. The banks would have the possibility to finance their investment opportunities through asset backed securities or through interbank liquidity. The interplay between the financial sector and the monetary authority will come through the liquidity injection of the central bank in the interbank market, which will alter the trade-offs for the banks between originating new securities and using available liquidity. The focus will be on two aspects of the model: whether an over-expansionary policy might produce the type of liquidity acceleration and the ensuing spread of systemic risk observed during the crisis and whether the possibility of cross-border activities in this context improves risk sharing. The project falls under the ECB-CFS network priority ‘Financial systems as risk managers, risk distributors and risk creators’, and the analysis of the relationship between financial stability and monetary policy.

 

 

Anton Korinek, Assistant Professor, University of Maryland

Research project: Systemic risk-taking and macro-prudential regulation

This project will further develop a theoretical model in which systemic risk arises when shocks to one part of the financial system (such as mortgage losses) are amplified through financial constraints and threaten the stability of the system as a whole. The proposed project will aim at showing that such amplification effects constitute true welfare externalities. A method will be proposed that allows assessing quantitatively the social costs of systemic amplification effects. It can be used to calculate the magnitude of the externalities imposed by different forms of risky assets. This provides guidance on how to adjust capital adequacy requirements so as to account for the social costs imposed by systemic risk. For example, credit default swaps require large payouts from financial institutions precisely in those states when financial constraints are most binding and amplification effects are strongest. This suggests that they impose potentially large systemic externalities and should be subjected to adequate capital adequacy. The project falls under the ECB-CFS network priority ‘Financial systems as risk managers, risk distributors and risk creators’, and the analysis of the financial crisis and, particularly, macro-prudential regulation.

 

 

Alberto Martin, Researcher and Adjunct Professor, CREI and Pompeu Fabra University

Research project: Asset bubbles, economic growth and welfare

This project will deal with the welfare effects and the policy implications of asset bubbles. There is a gap between the widespread perception of speculative bubbles as being potentially harmful for the economy and the prescriptions that emerge from economic models based on rational decision making. This paper will seek to bridge this gap by developing a theoretical model in which speculative bubbles can be detrimental to welfare even though they are the result of fully individually rational behaviour. The agenda will consist of two main parts: 1) a characterisation of the situation in which, due to the presence of financial frictions, asset bubbles may be detrimental for welfare, and 2) the design of optimal policy responses to welfare-reducing bubbles. The project is related to the ECB-CFS network priority ‘Financial systems as risk managers, risk distributors and risk creators’, and the analysis of macro-prudential supervision and regulation.

 

 

Lubomir Petrasek, PhD student, Pennsylvania State University

Research project: Multimarket trading and the cost of debt: Evidence from global bonds

The goal of this project is to examine the importance of multimarket trading on corporate bond prices and liquidity. Prior research into securities issuance and trading in multiple markets around the world suggests that firms can reduce their cost of capital by issuing global securities. The author will use the bond transactions data that recently became available through the Trade Reporting and Compliance Engine (TRACE) to examine the issuance, pricing, and liquidity of global bonds and compare them with local bond issues of the same (and different) firms. The project will attempt to answer empirically the following questions: 1) Can firms lower their cost of debt by issuing global bonds? 2) Do global offers reduce the price pressure associated with securities issuance and do they result in lower yield spreads on all outstanding issues? 3) Are global bonds priced differently than bonds issued locally by the same firms? 4) Are global bonds more liquid than bonds issued locally by the same firms? The project falls under the ECB-CFS network priorities ‘Financial systems as risk managers, risk distributors and risk creators’ and ‘Financial modernisation, governance, and the integration of the European financial system in global capital markets’.

 

Disclaimer