Tag Archives: Financial stability

ifo Schnelldienst 16/2018, August 23, 2018. PDF.

Central bankers often argue that CBDC would increase the risk of bank runs. On his blog, JP Koning rejects this notion. After all, he retorts, during a confidence crisis bank customers would no longer have to queue to withdraw cash; lender of last resort support would be provided much more quickly; and “large” cash holders would continue to shift funds into treasury bills, not into CBDC. Koning writes: The general criticism here is that during a crisis, households and businesses will...

In a CEPR discussion paper, Òscar Jordà, Björn Richter, Moritz Schularick, and Alan M. Taylor suggest that higher bank capital ratios help stabilize the financial system ex post but not ex ante, and that illiquidity breeds fragility. Abstract of their paper: Higher capital ratios are unlikely to prevent a financial crisis. This is empirically true both for the entire history of advanced economies between 1870 and 2013 and for the post-WW2 period, and holds both within and between...

On his blog, John Cochrane reports about a Hoover panel including him, Charles Plosser, and John Taylor. Cochrane focuses on the liability side. He favors a large quantity of (possibly interest bearing) reserves for financial stability reasons. Plosser focuses on the asset side and is worried about credit allocation by the Fed, for political economy reasons. Taylor favors a small balance sheet. Cochrane also talks about reserves for everyone, but issued by the Treasury.

Finanz und Wirtschaft, November 23, 2016. PDF. The diagnosis is far from clear. Nor is the therapy.

In a BIS working paper (January 2015), Bengt Holmstrom summarizes some of the implications of the research on information insensitive debt. He cautions against moves to increase transparency in debt markets and defends the shadow banking system. He explains why opacity and information insensitivity are valuable and argues that debt-on-debt arrangements are (privately) optimal. It all started with pawn shops: The beauty lies in the fact that collateralised lending obviates the need to...

I was asked to play devil’s advocate in a debate about “secular stagnation.” Here we go: Alvin Hansen, the “American Keynes” predicted the end of US growth in the late 1930s—just before the economy started to boom because of America’s entry into WWII. Soon, nobody talked about “secular stagnation” any more. 75 years later, Larry Summers has revived the argument. Many academics have reacted skeptically; at the 2015 ASSA meetings, Greg Mankiw predicted that nobody would talk about secular...

In BPEA, Natasha Sarin and Larry Summers argue that bank stock has not: … we find that financial market information provides little support for the view that major institutions are significantly safer than they were before the crisis and some support for the notion that risks have actually increased. … … financial markets may have underestimated risk prior to the crisis … Yet we believe that the main reason for our findings is that regulatory measures that have increased safety have been...

On his blog, Ben Bernanke discusses the merits of the Fed’s strategy to slowly reduce the size of its balance sheet to pre crisis levels. Bernanke suggests that this strategy should be reconsidered: First, the large balance sheet provides lots of safe and liquid assets for financial markets. This might strengthen financial stability. (DN: In my view, there are also reasons to expect the opposite.) Second, a larger balance sheet can help improve the workings of the monetary transmission...

Jonathan McMillan proposes a systemic solvency rule which stipulates that [t]he value of the real assets of a company has to be greater than or equal to the value of the company’s liabilities in the worst financial state. (p. 147) That is, the financial assets of a company have to be financed by equity. This reminds of Kotlikoff’s limited purpose banking, see here and here. McMillan (who is actually two persons, a banker and a journalist) argues that Kotlikoff’s proposal is a step in the...