Welcome to Scribd, the world's digital library. Read, publish, and share books and documents. See more ➡
Download
Standard view
Full view
of .
Add note
Save to My Library
Sync to mobile
Look up keyword
Like this
1Activity
×
0 of .
Results for:
No results containing your search query
P. 1
Monetary Policy, Bank Leverage, and Financial Stability

Monetary Policy, Bank Leverage, and Financial Stability

Ratings: (0)|Views: 285|Likes:
Published by babstar999

Monetary Policy, Bank Leverage, and Financial Stability

Author/Editor: Valencia, Fabian

Authorized for Distribution: October 01, 2011

Summary: This paper develops a model to assess how monetary policy rates affect bank risk-taking. In the model, a reduction in the risk-free rate increases lending profitability by reducing funding costs and increasing the surplus the monopolistic bank extracts from borrowers. Under limited liability, this increased profitability affects only upside returns, inducing the bank to take excessive leverage and hence risk. Excessive risk-taking increases as the interest rate decreases. At a broader level, the model illustrates how a benign macroeconomic environment can lead to excessive risk-taking, and thus it highlights a role for macroprudential regulation.

Source:http://www.imf.org/external/pubs/cat/longres.aspx?sk=25309.0

Monetary Policy, Bank Leverage, and Financial Stability

Author/Editor: Valencia, Fabian

Authorized for Distribution: October 01, 2011

Summary: This paper develops a model to assess how monetary policy rates affect bank risk-taking. In the model, a reduction in the risk-free rate increases lending profitability by reducing funding costs and increasing the surplus the monopolistic bank extracts from borrowers. Under limited liability, this increased profitability affects only upside returns, inducing the bank to take excessive leverage and hence risk. Excessive risk-taking increases as the interest rate decreases. At a broader level, the model illustrates how a benign macroeconomic environment can lead to excessive risk-taking, and thus it highlights a role for macroprudential regulation.

Source:http://www.imf.org/external/pubs/cat/longres.aspx?sk=25309.0

More info:

Categories:Business/Law, Finance
Published by: babstar999 on Oct 26, 2011
Copyright:Attribution Non-commercial

Availability:

Read on Scribd mobile: iPhone, iPad and Android.
download as PDF, TXT or read online from Scribd
See More
See less

11/04/2011

pdf

text

original

 
 
Monetary Policy, Bank Leverage, and FinancialStability
 Fabian Valencia
WP/11/244
 
© 2011 International Monetary Fund WP/
11/244
 
IMF Working Paper
Research
Monetary Policy, Bank Leverage, and Financial StabilityPrepared by Fabian Valencia
1
 
Authorized for distribution by Stijn ClaessensOctober 2011
Abstract
This paper develops a model to assess how monetary policy rates affect bank risk-taking.n the model, a reduction in the risk-free rate increases lending profitability by reducingfunding costs and increasing the surplus the monopolistic bank extracts from borrowers.nder limited liability, this increased profitability affects only upside returns, inducing theank to take excessive leverage and hence risk. Excessive risk-taking increases as theinterest rate decreases. At a broader level, the model illustrates how a benignacroeconomic environment can lead to excessive risk-taking, and thus it highlights aole for macroprudential regulation.JEL Classification Numbers:C61, E32, E44Keywords: Financial Stability, Bank Leverage, Monetary Policy, Macroprudential regulationAuthor’s E-Mail Address:fvalencia@imf.org
This Working Paper should not be reported as representing the views of the IMF.
The views expressed in this Working Paper are those of the author(s) and do not necessarilyrepresent those of the IMF or IMF policy. Working Papers describe research in progress by theauthor(s) and are published to elicit comments and to further debate.
1
I am grateful to Larry Ball, Christopher Carroll, Stijn Claessens, Manthos Delis, Giovanni Dell'Ariccia, LucLaeven, and Damiano Sandri for comments and discussions.
 
2Contents PageI. Introduction ............................................................................................................................3II. Loan and Deposit Contracts ..................................................................................................4A. Bank-Borrower Loan Contract ..........................................................................................5B. Bank-Depositor Contract ...................................................................................................6III. The Bank’s One Period Problem .........................................................................................7IV. The Infinite Horizon Case ...................................................................................................8A. Modeling the Bank as a Firm ............................................................................................81. A Constrained Social Planner Benchmark ...................................................................11B. Optimal Decision Rules ...................................................................................................12C. Response to Interest Rate Shocks ....................................................................................13V. The Model with Dividend Smoothing ................................................................................13A. Response to Interest Rate Shocks ....................................................................................15VI. Policy Experiments ............................................................................................................16VII. Conclusions ......................................................................................................................18References ................................................................................................................................20Appendices ...............................................................................................................................341. Calibration ........................................................................................................................342. Numerical solution ...........................................................................................................353. Mathematical Derivations ................................................................................................36List of tables1. Steady State Values ..........................................................................................................322. Steady State Values With and Without Regulatory Restrictions .....................................33List of figures1. Optimal Lending and Default Risk: The One Period Case ..............................................222. Marginal Value of Bank Capital ......................................................................................233. Lending and Dividends Optimal Decision Rules .............................................................244. Excessive Risk of Bank Default .......................................................................................255. Responses to an Interest Rate Shock ................................................................................266. Optimal Decision Rules with Dividend Smoothing .........................................................277. Excessive Risk of Bank Default in Model with Dividend Smoothing .............................288. Responses to an Interest Rate Shock in Model with Dividend Smoothing ......................299. Excessive Risk of Bank Default and Capital Requirements ............................................3010. Excessive Risk of Bank Default and Loan-to-value Caps .............................................3011. Responses to an Interest Rate Shock with Regulatory Restrictions ...............................31

You're Reading a Free Preview

Download
/*********** DO NOT ALTER ANYTHING BELOW THIS LINE ! ************/ var s_code=s.t();if(s_code)document.write(s_code)//-->