Abstract not found

by the generous help of Myra Hart (Equifax Predictive Services), Jim DiSalvo (Philadelphia Fed),

This paper summarizes and explains the main events of the liquidity and credit crunch in 2007-08. Starting with the trends leading up to the crisis, I explain how these events unfolded and how four different amplification mechanisms magnified losses in the mortgage market into large dislocations and turmoil in financial markets.

Abstract We develop a quantitative monetary DSGE model with …nancial intermediaries that face endogenously determined balance sheet constraints. We then use the model to evaluate the e¤ects of the central bank using unconventional monetary policy to combat a simulated …nancial crisis. We interpret unconventional monetary policy as expanding central bank credit intermediation to o¤set a disruption of private …nancial intermediation. Within our framework the central bank is less e¢ cient than private intermediaries at making loans but it has advantage of being able to elastically obtain funds by issuing riskless government debt. Unlike private intermediaries, it is not balance-sheet constrained. During a crisis, the balance sheet constraints on private intermediaries tighten, raising the net bene…ts from central bank intermediation. These bene…ts may be substantial even if the zero lower bound constraint on the nominal interest rate is not binding. In the event this constraint is binding, though, these net bene…ts may be signi…cantly enhanced. Much thanks to Bob Hall and Hal Cole for comments on an earlier draft and to Luca Guerrieri for computational help.

I empirically explore the syndicated loan market, with an emphasis on how informa-tion asymmetry between lenders and borrowers influences syndicate structure and on which lenders become syndicate members. Consistent with moral hazard in moni-toring, the lead bank retains a larger share of the loan and forms a more concentrated syndicate when the borrower requires more intense monitoring and due diligence. When information asymmetry between the borrower and lenders is potentially se-vere, participant lenders are closer to the borrower, both geographically and in terms of previous lending relationships. Lead bank and borrower reputation mitigates, but does not eliminate information asymmetry problems. SYNDICATED LOANS ARE A LARGE and increasingly important source of corporate finance. Nonfinancial U.S. businesses obtain almost $1 trillion in new syndi-cated loans each year, which represents approximately 15 % of their aggregate debt outstanding, and of the largest 500 nonfinancial firms in the Compus-tat universe in 2002, almost 90 % obtained a syndicated loan between 1994 and

Do foreign banks shy away from relationship loans requiring close monitoring and soft information in emerging economies? The difficulty in answering this question lies in separating distance constraints, i.e. constraints faced by foreign banks due to control from long distances, from traditional constraints (the usual agency costs), and borrower fundamentals. This paper separates the three by exploiting a unique panel data set containing detailed loan-level information on the universe of all 79,323 private bank loans in Pakistan. The results indicate that distance constraints significantly prevent foreign banks from lending to “informationally difficult ” yet fundamentally sound clients requiring relational contracting. Consistent with this notion, I also find that foreign banks are less likely to bilaterally renegotiate (they litigate more), and are considerably less successful at recovering defaults. A number of independent tests show that neither traditional constraints nor fundamentals are able to explain these findings. Graduate School of Business, University of Chicago.

Banks are known to fail either because they are intrinsically insolvent or because an aggregate shortage of liquidity renders them insolvent. We show that the reverse can also happen: bank failures can shrink the common pool of liquidity, leading to a contagion of failures and a possible total meltdown of the system. Given the costs of a meltdown, there is a possible role for government intervention. Unfortunately, liquidity problems and solvency problems interact and can cause each other, making it hard to determine the root cause of a crisis from observable factors. We propose a robust sequence of intervention. Our work suggests the conventional wisdom of helping only solvent but illiquid banks in a crisis has to be rethought. We are grateful to John Cochrane, Isabel Gödde, Nobu Kiyotaki, and three anonymous referees for very helpful comments on an earlier draft, and to Steve Ross and participants at the NBER Economic Fluctuations meetings in February 2001 for helpful suggestions. We are grateful for financial support from the National Science Foundation and the Center for Research on Security Prices. Rajan also thanks the Center for the Study of the State and the Economy for financial support. Many economists would agree that an important role of a central bank is to alleviate a

the problems and opportunities facing the financial services industry in its search for competitive excellence. The Center's research focuses on the issues related to managing risk at the firm level as well as ways to improve productivity and performance. The Center fosters the development of a community of faculty, visiting scholars and Ph.D. candidates whose research interests complement and support the mission of the Center. The Center works closely with industry executives and practitioners to ensure that its research is informed by the operating realities and competitive demands facing industry participants as they pursue competitive excellence. Copies of the working papers summarized here are available from the Center. If you would like to learn more about the Center or become a member of our research community, please let us know of your interest.

Abstract. This paper shows that financial constraints of local banks in emerging markets lead to underinvestment and credit constrained borrowers. I find that local bank lending is sensitive to an exogenous expansion in the availability of external financing. Using novel data to measure risk and return on marginal lending, I show that the profitability of loans does not decline during lending expansions. The resulting credit expansion leads to an increase in total borrower debt, holding investment opportunities constant. Overall, financial shocks to constrained banks are found to have a quick, persistent and amplified effect on the aggregate supply of credit. (JEL: G21, E50, D82) * Columbia University GSB. This paper was formerly circulated under the title: “Constrained Banks, Constrained

Abstract The credit derivatives market provides a liquid but opaque forum for secondary market trading of banking assets. I show that when entrepreneurs rely upon the certification value of bank debt to obtain cheap bond market finance, the existence of a credit derivatives market may cause them to issue sub-investment grade bonds instead, and to engage in second-best behaviour. Credit derivatives can therefore cause disintermediation and thus reduce welfare.