Banks, Liquidity Management, and Monetary Policy by Javier Bianchi and Saki Bigio Itamar Drechsler
NYU Stern and NBER
Bu/Boston Fed Conference on Macro-Finance Linkages 2013
Objectives
1. To develop a model of how monetary policy works through and interacts with the banking system. • have an explicit role for the financial system/banks
2. Use the model to interpret stylized facts about the financial crisis and the policies undertaken by central banks • why banks have had large increases in reserves holdings without a
correspondingly large increase in lending
Discussion of Bianchi and Bigio (2013)
2/12
Model
Agents: • Banks: have wealth (bank equity), derive power utility from dividend
payouts • Depositors : lend to banks via demand deposits • no other role in the model
• Central bank
Time: each day has two periods • beginning of the day: a “lending stage” • end of the day: a “balancing stage”
Discussion of Bianchi and Bigio (2013)
3/12
Model At the beginning of the day banks decide how much to: • borrow from depositors • invest in loans: high return • invest in “reserves”: low return • to satisfy a reserves requirement equal: a fraction ρ of deposits • reserves requirement is imposed at the end of the day
At the end of the day: • Banks are hit by exogenous deposit withdrawal shocks • reserves depleted to redeem deposits • if reserves requirement is violated → must borrow shortfall from
central bank • there is no interbank market for borrowing reserves • central bank levies a high penalty rate for borrowing reserves shortfall • also penalizes excess reserves holdings
Discussion of Bianchi and Bigio (2013)
4/12
Model
Banks are also subject to regulatory requirements: • Capital requirement (at the beginning of day) • D/E < k • Liquidity reserves requirement (at the beginning of day) • why does the model need this?
Banks problem is a portfolio choice problem (homogenous in wealth/equity) • expected penalty is a function of the weights in deposits and reserves
Discussion of Bianchi and Bigio (2013)
5/12
Main tradeoff Investing another dollar in loans: • earns high return • but increases the reserves shortfall incurred for a given deposit shock • optimal choice determines the supply of loans
- note: capital requirement binds in the numerical analysis • keeps banks from borrowing more deposits to buy reserves to
increase reserves ratio • in practice reserves have 0 risk weight so wouldn’t violate capital
requirements
Central bank can change the supply of loans by altering this tradeoff • the return on loans net of the expected reserves shortfall penalty
Discussion of Bianchi and Bigio (2013)
6/12
Clarification/Questions
• What does the central bank do in the model to manage monetary
policy? • vary the ex-post penalty rate? the reserves requirement? • change the ex-ante cost of holding reserves? • not clear in the paper right now
• How does this map to what we see in practice? • e.g., changes in the nominal interest rate?
Discussion of Bianchi and Bigio (2013)
7/12
Comments
Model is driven by some strong assumptions: 1
Banks cannot share risk of (idiosyncratic) deposit shocks • banks have no default risk and there is no adverse selection in the
model, so why not? • in practice there is a very large, active interbank lending market for
such purposes • Fed Funds and London interbank markets • market for overnight secured loans
- note: there is no systemic risk in the model (deposits remain in the banking system)
Discussion of Bianchi and Bigio (2013)
8/12
Comments
2
Central imposes a high penalty for banks for lending reservs • there is no agency problem, so why do this? • it is welfare-decreasing • runs counter to the spirit of central banks’ recent interventions as
lender of last resort • indeed, lender of last resort theory exactly says that central bank should alleviate such interbank freezes • the model reverses this: central bank affects ex-ante outcomes by threatening not to (fully) perform this function
Discussion of Bianchi and Bigio (2013)
9/12
Comments
3
Exogenous deposit withdrawals • what drives these? • Acharya and Mora (2013) report smaller dispersion in deposit growth • (-.006, 0.028) for 25%-75% of growth for 1990Q1-2009Q4
4
No equity issuance • can only increase equity by retaining profits • a common but strong assumption to get accelerator effects
Discussion of Bianchi and Bigio (2013)
10/12
Reserves vs. Liquid Assets
• Could think of liquid assets in place of reserves • banks need to hold a precautionary buffer of liquid assets in case of
a negative shock to assets or funding - loans are illiquid • the return on liquid assets will affect the supply of loans (as in this
paper) • government may be able to affect the return on liquid securities - e.g., Krishnamurthy and Vissing-Jorgensen (2012): supply of US government bonds affects spread between treasuries and corporates • note: effect is at the system level, not individual banks
Discussion of Bianchi and Bigio (2013)
11/12
Final thoughts
• Important topic: new perspectives on monetary policy channels • An intriguing approach • So why do banks hoard reserves without increasing lending?
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