where is the ge consumption dynamics in dsges we offer a partial equilibrium perspective on the behavior of consumption in dynamic stochastic general equilibrium dsge models we consider a benchmark dynamic general equilibrium model and show that a standard calibration implies that the real interest rate is essentially fixed one manifestation of this feature is that with separable preferences the reaction of consumption to total factor productivity tfp shocks is flat the random walk permanent income hypothesis holds almost exactly pretty much as in a partial equilibrium consumption savings problem these results help explain the prominent role of aggregate demand and how it is achieved in modern dsge analysis

this time is the same using bank performance in 1998 to explain bank performance during the recent financial crisis are some banks prone to perform poorly during crises if yes why in this paper we show that a bank s stock return performance during the 1998 crisis predicts its stock return performance and probability of failure during the recent financial crisis this effect is economically large our findings are consistent with persistence in a bank s risk culture and or aspects of its business model that make its performance sensitive to crises banks that relied more on short term funding had more leverage and grew more are more likely to be banks that performed poorly in both crises

bank regulation risk and return evidence from the credit and sovereign debt crises in this paper we analyze whether regulation reduced risk during the credit crisis and the sovereign debt crisis for a cross section of global banks in this regard we examine distance to default laeven and levine 2008 systemic risk acharya et al 2010 idiosyncratic risk and systematic risk we employ world bank survey data on regulations to test our conjectures we find that regulatory restrictions official supervisory power capital stringency along with private monitoring can explain bank risk in both crises additionally we find that deposit insurance schemes enhance moral hazard as this encouraged banks to take on more risk and perform poorly during the sovereign debt crisis finally official supervision and private monitoring explains the returns during both crisis periods

do capital adequacy requirements reduce risks in banking abstract in a dynamic framework it is shown that capital adequacy rules may increase a bank s riskiness in addition to the standard negative effect of rents on risk attitudes of banks a further intertemporal effect has to be considered the intuition behind the result is that under binding capital requirements an additional unit of equity tomorrow is more valuable to a bank if raising equity is excessively costly the only possibility to increase equity tomorrow is to increase risk today

does deposit insurance increase banking system stability an empirical investigation based on evidence of 61 countries in 1980 97 the authors find that explicit deposit insurance tends to be detrimental to bank stability the more so where bank interest rates are deregulated and the institutional environment is weak the adverse impact of deposit insurance on bank stability tends to be stronger the more extensive is the coverage offered to depositors and where the scheme is funded and run by the government rather than the private sector

capital requirements monetary policy and aggregate bank lending theory and empirical evidence capital requirements linked solely to credit risk are shown to increase equilibrium credit rationing and lower aggregate lending the model predicts that the bank s decision to lend will cause an abnormal runup in the borrower s stock price and that this reaction will be greater the more capital constrained the bank i provide empirical support for this prediction the model explains the recent inability of the federal reserve to stimulate bank lending by increasing the money supply i show that increasing the money supply can either raise or lower lending when capital requirements are linked only to credit risk the motivation of this article is first to examine the impact of risk based capital requirements namely those that link mandatory capital to asset ratios for banks to their loans on aggregate bank lending these requirements called the basle capital rules or bis guidelines went into effect in march 1989 for banks in the leading industrialized nations these rules initially required banks to maintain capital equal to 7 25 percent of business and most consumer loans with the requirement increasing to 8 percent by the end of 1992 secondly i wish to understand the link between monetary policy and aggregate bank credit in the presence of risk based capital requirements my curiosity is sparked in part by two recent phenomena one is the experience of the u s economy which displayed sluggish growth during 1989 93 despite a monetary policy that attempted to spur bank lending and economic activity and the other is the striking decline in loans relative to security holdings mostly government bonds in the asset portfolios of u s

universal banking and firm risk taking abstract this paper analyzes the welfare implications of banks taking equity stakes in firms under conditions of imperfect information and moral hazard two cases of bank control over investment decisions are analyzed in the first the bank does not control the investment decisions of the firm here the investment efficiency is higher and bank risk is lower for an optimal positive level of bank equity holdings however in the case when the bank has veto power over investment proposals by the firm there is a trade off between increased investment efficiency and increased bank risk

risk in banking and capital regulation this paper investigates the role of bank capital regulation in risk control it is known that banks choose portfolios of higher risk because of inefficiently priced deposit insurance bank capital regulation is a way to redress this bias toward risk utilizing the mean variance model the following results are shown a the use of simple capital ratios in regulation is an ineffective means to bound the insolvency risk of banks b as a solution to problems of the capital ratio regulation the theoretically correct risk weights under the risk based capital plan are explicitly derived and c the theoretically correct risk weights are restrictions on asset composition which alters the optimal portfolio choice of banking firms the recent increase in bank failures especially after the 1980 and 1982 deregulatory acts has again ignited a controversy over the risk portfolio of the banking industry given the importance of this sector there has been increased scrutiny of the industry s motives for risk taking and possible regulatory changes to improve its stability these investigations have centered around two rather complementary areas the first of these is the role of deposit insurance and how its current pricing procedure encourages risk taking and justifies current bank regulations the works of buser chen and kane 4 kane 9 and benston et al 2 have made substantive contributions the authors demonstrates the way in which our current fixed rate insurance system rewards risk taking by the firm and insulates it through deposit insurance from the market discipline that needs to exist to ensure proper risk evaluation this realization has led these authors to propose a series of regulatory changes to encourage proper portfolio choice within the industry these include a shift to market value accounting risk based deposit insurance premiums and additional capital regulation the last of these serves as a method of coinsurance whereby higher capital levels require the bank to absorb greater losses in the event of failure and encourage additional prudence in management in essense it is one method of risk reduction that may offset the risk preference imposed on the industry due to the inappropriate insurance pricing because the amount of capital influences the probability of bank insolvency and thus the soundness of the entire banking system the regulators ceteris paribus prefer more capital to

capital shortfall a new approach to ranking and regulating systemic risks the financial crisis of 2007 2009 has given way to the sovereign debt crisis of 2010 2012 yet many of the banking issues remain the same we discuss a method to estimate the capital that a financial firm would need to raise if we have another financial crisis this measure of capital shortfall is based on publicly available information but is conceptually similar to the stress tests conducted by us and european regulators we argue that this measure summarizes the major characteristics of systemic risk and provides a reliable interpretation of the past and current financial crises

the role of regulatory arbitrage in u s banks international lending flows bank level evidence this paper examines how cross border differences in the stringency of bank regulations affect u s banks international activities the analysis relies on a unique bank level dataset on the globally most active u s banks balance sheet as well as their cross border foreign affiliate lending and foreign market entry choices in 82 foreign countries in the 2003 2013 period results show that u s banks are significantly more likely to enter foreign markets with relatively laxer bank capital and disclosure requirements and exit foreign markets with relatively stricter deposit insurance schemes and more restrictions on activities banks substitute away from foreign affiliate lending via subsidiaries in the foreign country towards cross border lending originating from the u s in foreign countries with more powerful and independent bank regulators and limits on activities

a reexamination of mean variance analysis of bank capital regulation abstract the mean variance framework has been used to analyze the effects of bank capital regulation on the asset and bankruptcy risk of insured utility maximizing banks this literature claims that more stringent capital regulation will increase asset risk and can increase bankruptcy risk these conclusions are notable because they are opposite to those obtained for insured value maximizing banks in this paper we show that the utility maximization literature does not support its conclusions regarding the effects of bank capital regulation because it has mischaracterized the bank s investment opportunity set by neglecting the option value of deposit insurance

principal agent problems in s l salvage new legislation and traditional fdic insolvency resolution procedures transform and intensify the principal agent problems most responsible for the fslic mess these problems explain counterproductive constraints on the governance and operating policies of the agency responsible for rescuing and salvaging assets in insolvent thrifts the rtc the constraints slow insolvency resolution increase interim financing costs and undermine rtc recovery of asset value operationalizing its task as preserving evanescent and economically misconceived franchise values the rtc allows insolvents to seek financing on an unconsolidated basis initiates bidding for one institution at a time holds back seriously troubled assets and recruits an overly narrow range of bidders although the federal savings and loan insurance corporation fslic is officially defunct its corporate corpse lives on in two successor institutions its deposit insurance business has been taken over by the savings association insurance fund saif while its liquidation or salvage business has been assigned to the resolution trust corporation rtc both saif and rtc have the same stockholder principals federal taxpayers also both are operated by the federal deposit insurance corporation fdic nevertheless their governing structures differ markedly and in a perverse way to maximize net returns from salvage experience suggests the theory that a salvage or value recovery operation requires the aggressive operating flexibility of an automobile junkyard in a junkyard essentially everything in the salvor s inventory is open for inspection stripping and sale to anyone at any time hardto market hulks are compacted into scrap metal i e pooled and shipped out on what can be compared to a bulk sales or auction basis on a strict timetable the yard either owns or transacts with a fleet of tow trucks and has enough operating capital to bring in new wrecks as they appear this paper argues that unlike a private salvor the rtc is saddled with the additional objective of slowing down official recognition of the full size of fslic s losses to this end the financial institutions reform recovery and enforcement act firrea underfunds the rtc requires delayed sales of residential properties ostensibly to promote the availability of affordable housing and creates a superfluous five person rtc oversight board whose incentives are to deprive rtc decisionmakers of desirable operating flexibility the rtc oversight board creates an appearance of improved accountability to taxpayers that runs exactly opposite to its true economic effects three of the

external adjustment and the global crisis abstract the period preceding the global financial crisis was characterized by a substantial widening of current account imbalances across the world since the onset of the crisis these imbalances have contracted to a significant extent in this paper we analyze the ongoing process of external adjustment in advanced economies and emerging markets we find that countries whose pre crisis current account balances were in excess of what could be explained by standard economic fundamentals have experienced the largest contractions in their external balance we subsequently examine the contributions of real exchange rates domestic demand and domestic output to the adjustment process allowing for differences across exchange rate regimes and find that external adjustment in deficit countries was achieved primarily through demand compression rather than expenditure switching finally we show that changes in other investment flows were the main channel of financial account adjustment with official external assistance and ecb liquidity cushioning the exit of private capital flows for some countries

the european sovereign debt crisis the origin and propagation of the european sovereign debt crisis can be attributed to the flawed original design of the euro in particular there was an incomplete understanding of the fragility of a monetary union under crisis conditions especially in the absence of banking union and other european level buffer mechanisms moreover the inherent messiness involved in proposing and implementing incremental multicountry crisis management responses on the fly has been an important destabilizing factor throughout the crisis after diagnosing the situation we consider reforms that might improve the resilience of the euro area to future fiscal shocks

deposit insurance and risk taking behavior in the credit union industry abstract this paper examines the relationship between deposit insurance and risk taking behavior within the credit union industry time series tests employing industry average financial ratios for federal and state credit unions did not support the increased risk taking hypothesis although federal credit union capital declined immediately following the adoption of deposit insurance this was most likely the result of reduced capital requirements not deposit insurance liquidity and loan delinquency ratios had a negative time trend coefficient implying a decline in risk taking behavior during the post insurance period cross sectional test results employing iowa state chartered credit union data indicated that insured credit unions were better capitalized and more liquid than their uninsured counterparts overall there was no evidence that the adoption of deposit insurance increased the risk taking behavior of credit unions

international financial market integration asset compositions and the falling exchange rate pass through this paper provides an explanation for the observed decline of the exchange rate pass through into import prices by modeling the effects of nancial market integration on the optimal choice of the pricing currency in the context of rigid nominal goods prices contrary to previous literature the interdependence of this choice with the optimal portfolio choice of internationally traded nancial assets is explicitly taken into account in particular price setters move towards more local currency pricing while the debt portfolio includes more foreign assets following increased nancial integration both predictions are in line with novel empirical evidence

market discipline and deposit insurance cross country evidence presented in this paper suggests that explicit deposit insurance reduces required deposit interest rates while at the same time it lowers market discipline on bank risk taking internationally deposit insurance schemes vary widely in their coverage funding and management this reflects that there are widely differing views on how deposit insurance should optimally be structured to inform this debate we use a newly constructed data set of deposit insurance design features to examine how different design features affect deposit interest rates and market discipline

does deposit insurance improve financial intermediation evidence from the russian experiment this study examines how the introduction of deposit insurance affects depositors and banks using the deposit insurance scheme introduced into the russian banking system as a natural experiment the fundamental research question is whether the introduction of deposit insurance leads to a more effective banking system as evidenced by increased deposit taking and decreased reliance upon state owned banks as custodians of retail deposits we find that banks entering the new deposit insurance system increase both their level of retail deposits and their ratios of retail deposits to total assets relative to banks that do not enter the new deposit insurance system these results hold up in a multivariate panel data analysis that controls for bank and time random effects the longer a bank has been entered into the deposit insurance system the greater is its level of deposits and its ratio of deposits to assets moreover this effect is stronger for regional banks and for smaller banks we also find that implementation of the new deposit insurance system has the effect of leveling the playing field between state owned banks and privately owned banks finally we find strong evidence of moral hazard following implementation of deposit insurance in the form of increased bank risk taking financial risk and to a lesser degree operating risk increase following implementation

crash risk of the euro in the sovereign debt crisis of 2009 2010 the economic political instability of a country which is tied to its credit risk often leads to sharp depreciation and heightened volatility in its currency this paper shows that not only the creditworthiness of the euro area countries with weaker fiscal positions but also that of the member countries with more sound fiscal positions are important determinants of the deep out of the money euro put option prices which embedded information on the euro crash risk during the sovereign debt crisis of 2009 2010 we also find evidence of information flow from the sovereign credit default swap market to the currency option market during the crisis