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Working Paper
Pre-Positioning and Cross-Border Financial Intermediation
The benefits of cross-border financial activity are wide-ranging, from greater competition and more efficient markets to broader and more stable access to capital. During normal economic times, the official sector and private sector share an incentive to foster such cross-border financial activities. During a financial crisis, however, the short-term alignment of official- and private-sector incentives can diverge—sometimes significantly. We present a game-theoretic model of the underlying trade-offs and discuss lessons for international financial regulators, placing them in the ...
Discussion Paper
Common Stock Repurchases during the Financial Crisis
Large bank holding companies (BHCs) continued to pay dividends to their shareholders well after the onset of the recent financial crisis. Academics, industry analysts, and policymakers have noted that these payments reduced capital at these firms at a time when there was considerable uncertainty about the full extent of losses facing individual banks and the banking industry. But dividends are not the only means to return capital to shareholders; stock repurchases serve much the same function. In this post, I examine common stock repurchases by large BHCs during the financial crisis and show ...
Discussion Paper
Bank Capital and Risk: Cautionary or Precautionary?
Do riskier banks have more capital? Banking companies with more equity capital are better protected against failure, all else equal, because they can absorb more losses before becoming insolvent. As a result, banks with riskier income and assets would hopefully choose to fund themselves with relatively more equity and less debt, giving them a larger equity cushion against potential losses. In this post, we use a top-down stress test model of the U.S. banking system?the Capital and Loss Assessment under Stress Scenarios (CLASS) model?to assess whether banks that are forecast to lose capital in ...
Working Paper
Why Are Banks Not Recapitalized During Crises?
I develop a model where the sovereign debt capacity depends on the capitalization of domestic banks. Low-capital banks optimally tilt their government bond portfolio toward domestic securities, linking their destiny to that of the sovereign. If the sovereign risk is sufficiently high, low-capital banks reduce private lending to further increase their holdings of domestic government bonds, lowering sovereign yields and supporting the home sovereign debt capacity. The model rationalizes, in the context of the eurozone periphery, the increase in domestic government bond holdings, the reduction ...
Working Paper
Pre-Positioning and Cross-Border Financial Intermediation
The benefits of cross-border financial activity are wide-ranging, from greater competition and more efficient markets to broader and more stable access to capital. During normal economic times, the official sector and private sector share an incentive to foster such cross-border financial activities. During a financial crisis, however, the short-term alignment of official- and private-sector incentives can diverge—sometimes significantly. We present a game-theoretic model of the underlying trade-offs and discuss lessons for international financial regulators, placing them in the ...