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Discussion of "Shadow Banking and Market Discipline on Traditional Banks"

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Abstract

Discussion of the paper "Shadow Banking and Market Discipline on Traditional Banks" by Anil Ari, Matthieu Darracq-Pariès, Christoffer Kok, and Dawid Zochowski.
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Shadow Banking and Market Discipline on
Traditional Banks
By Anil Ari, Matthieu Darracq-Pariès,
Christo¤er Kok, and Dawid Zochowski
Discussant: Jonathan Benchimol1
Systemic Risk and Macroprudential Policy
CEPR Conference, Tel Aviv
December 17, 2018
This pre sentat ion does not necessarily re‡ect the view s of the Bank of Israel
1Bank of Israel
Jonat han Benchimol Bank o f Israel
Intro duction
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Summ ary
Motiv ations
Message
Model (1)
IShadow banks (SBs) and traditional banks (TBs) interact in
one model with
Iendogenous sector size.
Isimilar functions.
ITo prevent early withdrawals by their depositors
ITBs safe portfolio strategy.
ISBs high risk-taking + early liquidation after bad news.
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Summ ary
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Model (2)
IThere is an equilibrium relationship between …re-sales and
bank strategies:
ISBs liquidate their assets in the secondary market to repay
their depositors during early withdrawals.
IFire-sale externalities create strategic substitutabilities in
banks’decision to pursue a shadow banking strategy.
ISBs liquidation )deeper …re-sale )reduce the payo¤ from
shadow banking relative to traditional banking )bring an
equilibrium where SBs and TBs coexist.
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Summ ary
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Results
IThe size of the shadow banking sector increases in the cost of
commitment and the availability of liquidity in the secondary
market.
IThe shadow banking sector grows ine¢ ciently large in
equilibrium due to …re-sale externalities, with systemic
consequences on TBs.
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Why ?
IAnalyze the GFC transmission to the traditional banking
sector, and policy debates on shadow banking.
IThe shadow banking sector expanded rapidly until its collapse
in 2007.
ISBs faced a sudden contraction in funding and the liquidation
of their assets caused a …re-sale.
ITBs did not su¤er from withdrawals, experienced a sharp rise
in their funding costs, and re-allocated their portfolios towards
safe and liquid assets ) " liabilities.
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Summ ary
Motiv ations
Message
What is the message ?
IOptimal policy is a Pigouvian tax on SBs )reduces the size
of the shadow banking sector.
ITax on risky assets in the secondary market =)second-best:
Ireduces entry into shadow banking.
Ialleviates the …re-sale on safe assets.
Icurtails liquidity risk on TBs.
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Tax
Concept
Questions
What drive SBs ?
IAccording to IMF (2014), shadow banking is developing when:
Iinterest rates are low and investors are seeking higher yields.
Ithere is a high demand for assets.2
Ibanking regulation is hardens.
2For instance from insurance companies or pension funds.
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Tax
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TBs and SBs interlinkages
IThe o¢ cial banking system has supported a signi…cant part of
shadow banking.
IThe asset backed commercial paper (ABCP) conduits or the
structured investment vehicles (SIV), which were exposed to
the US housing market during the GFC, all enjoyed guarantees
by TBs (put options) by way of contract or reputation.3
IThe remainder of shadow banking was still problematic for
…nancial stability because of the contracts in which shadow
banks were counterparty to banks.
IAIG was counterparty to a signi…cant part of the banking
system relying on CDS to insure against the default of MBS.
3Adrian, Ashcraft, Boesky, and Pozsar (2012). Shadow Banking. Revue
d’Économie Financière.
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Tax
Concept
Questions
To supervise TBs, tax SBs?
ILike Plantin (2015) and Ordonez (2018), this paper shows
taxing SBs compensates the welfare loss of TBs’
(over)supervision.
IWhich welfare ? Short or long term welfare?
ISBs are private companies. Should we tax it because its size
increases?
IDoes the only way to supervise TBs is to limit the freedom of
enterprise ?
IThe trade-o¤ between increasing the supervision power and
the ways to circumvent this power is not so simple.
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Tax
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To supervise SBs, supervise SBs !
ITaxing SBs ) # entry ) " concentration ) # competition
) " prices )tax e¤ect disappears.
ITaxing SBs )too big to fail.
ISB supervision could be better than optimal taxing...
ITax does not impact the price of risk.
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Tax
Concept
Questions
You still want to tax?
ILet’s tax but what should we do with the money?
IFinance SB supervision/monitoring?
IFinance a fund/insurance to hedge the future crisis?
IDi¤erential taxation according to the quality of assets/loans.
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Tax
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Questions
Maybe you want to monitor?
IVítor Constâncio, Vice-President of the ECB:
The shadow banking sector has a natural tendency to
grow until it becomes systemically important for the
entire …nancial system and endangers the stability of the
banking sector. Stress testing shadow banks could unveil
the vulnerabilities in this sector and help assessing the
potential for spillover of the stress in that sector to the
rest of the …nancial sector.
IHuge di¤erence between monitoring, supervising and taxing.
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Tax
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Why shadow banking?
IBanking regulation and supervision led to shadow banking.
What would happen if we supervise a system that is the result
of supervision ?
IWhat utility does shadow banking ful…ll?
IShadow banking:
IBypass expensive regulation (τ).
ITake risks.
IPrivate company.
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Tax
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Monetary economics (1)
IWhat about monetary economics ?
IDo households have preference to hold money ?
IPozsar (2014). Shadow Banking: The Money View. OFR.
IOther channels drive SBs to a¤ect TBs:
IBehavioral panics
IInformation contagion
ITBs own o¤-balance sheet conduits + provide liquidity
guarantees.
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Monetary economics (2)
IDestabilizing properties of shadow banking could …nd its
roots in contractionary monetary policy
)shadow banking loans to rise rapidly.
)o¤setting the expected decline of traditional bank loans.
)hampering the e¤ectiveness of monetary policy on total bank credit.
IStabilizing properties of shadow banking could …nd its roots
in unconventional monetary policy4
)prevents the reintermediation between the two banking sectors.
)intervention contains the drop in prices.
)faster recovery in the net worth of shadow banks.
) # initial deterioration in asset quality.
4QE as a central bank intervention in the asset market.
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Tax
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Law and economics
IIs it legal to tax shadow banking ? In all countries?
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More
IThere are a lot of shadow banking system de…nitions.
IDi¤erent size dynamics over time.
IDo most of these de…nitions fall into this model?
IThere are good reasons to expect that TBs bene…t from SBs
collapse.
IDepositors switch from SBs to TBs (‡ight to safety but also
ight to supervised framework).
IFlight to safety )government bonds appreciation (TBs’safe
assets).
ITBs can use their fund to acquire undervalued assets.
IIn reality, SBs invest in less risky assets.
IAre SBs and TBs complements or substitutes ?
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Tax
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Reading list
ITraditional and Shadow Banks During The Crisis,
IEdouard Chrétien and Victor Lyonnet.
IShadow Banking and the Four Pillars of Traditional Financial
Intermediation,
IEmmanuel Farhi and Jean Tirole.
IA Model of Endogenous Loan Quality and the Collapse of the
Shadow Banking System,
IFrancesco Ferrante (AEJ Macro).
IThe Nexus of Monetary Policy and Shadow Banking in China,
IKaiji Chen, Jue Ren and Tao Zha (AER).
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What about the paper?
IThis paper is
Ivery interesting.
Irecommended to the audience.
IThe conclusions are clear and justi…ed through a structural
framework.
IThis paper opens several ways of improvement and further
research.
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Further research
IAlthough an interesting calibration exercise is presented, the
reader wants to know how this model …ts real data.
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Thanks
IThank for your attention.
IEmail : jonathan@benchimol.name
IWebsite: JonathanBenchimol.com
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