Discussion of A Macroeconomic Model of Endogenous System Risk Taking by David Martinez-Miera and Javier Suarez

Transcription

1 Discussion of A Macroeconomic Model of Endogenous System Risk Taking by David Martinez-Miera and Javier Suarez Martin Ellison University of Oxford December 2010 Martin Ellison ()EABCN conference December / 9

2 Setting the scene Patient agents save in banks Banks invest in rms Firms have access to two technologies: f(r) Non systemic f(r) Systemic R R Non-systemic dominates systemic for society Cannot diversify away fat tail of systemic Martin Ellison ()EABCN conference December / 9

3 Setting the scene Banks have limited liability: f(r) Non systemic f(r) Systemic R R Systemic dominates non-systemic for bank Bank investing in systemic mimics bank investing in non-systemic Lack of transparency means agents cannot hold banks to account Martin Ellison ()EABCN conference December / 9

4 Anatomy of a crisis Patient agents save in banks but due to lack of transparency do not know what risks are taken Banks have an incentive to invest in systemic due to limited liability When systemic shock occurs get deeper crisis Policy recommendation is capital requirements to reduce limited liability e ects Quite blunt instrument as also reduces investment in non-systemic Martin Ellison ()EABCN conference December / 9

5 Comments 1 Very nice paper 2 What is systemic risk? 3 Capital requirements and duration of crises Martin Ellison ()EABCN conference December / 9

6 Systemic risk Banks over-invest in systemic because of limited liability... and agents do not hold banks to account because of lack of transparency... and systemic risk is exogenous This is a model of endogenous exposure to exogenous risk Why do non-systemic and systemic technologies have assumed distributions? Only half of story! probability of systemic shock should also be endogenous Martin Ellison ()EABCN conference December / 9

7 Endogenous systemic shocks The Hedge Fund Game by Dean Foster and Peyton Young Limited liability (2+20) gives unskilled hedge fund managers incentive to mimic skilled hedge fund managers Unskilled managers mimic skilled managers by taking positions on derivatives markets (put and call options) Lack of transparency prevents savers from holding hedge funds to account If all unskilled managers take similar positions in same derivate markets (stock prices) then get endogenous systemic risk Possible microfoundations for exogenous systemic risk? Martin Ellison ()EABCN conference December / 9

8 Capital requirements and duration of crises Duration of crisis depends on how long it takes equity to recover e e low capital requirement high capital requirement e e High capital requirement! smaller impact on equity Correspondence is steeper for higher capital requirement High capital requirement! equity takes longer to recover Martin Ellison ()EABCN conference December / 9

9 Speed of recovery and welfare Capital requirements make economy resilient but slow to recover e low capital requirement high capital requirement t Optimal capital requirement in calibrated model 14% Maximises model-consistent welfare function In reality may be good reasons to recover quicker Countercyclical or procyclical capital requirements? Martin Ellison ()EABCN conference December / 9