Bank Supervision, Support and Resolution Policies
Friday, Jan. 6, 2017 3:15 PM – 5:15 PM
- Chair: Randall S. Kroszner, University of Chicago
Does a Larger Menu Increase Appetite? Collateral Eligibility and Bank Risk-Taking
AbstractWe examine a change in the European Central Bank’s collateral framework, which significantly lowered the rating requirement for eligible residential mortgage-backed securities (RMBS), and its impact on bank lending and risk-taking in the Netherlands. Banks most affected by the policy increase loan supply and lower interest rates on new mortgage originations. These lower interest rate loans serve as collateral for newly issued RMBS with lower-rated tranches and subsequently experience worse repayment performance. The performance deterioration is pronounced among loans with state guarantees, which suggests looser collateral requirements may lead to undesired credit risk transfer to the sovereign.
Bank Resolution and the Structure of Global Banks
AbstractWe study the efficient resolution of global banks by national regulators. Single-point-of-entry (SPOE) resolution, where loss-absorbing capacity is shared across jurisdictions, is efficient in principle, but may not be implementable. First, when expected transfers across jurisdictions are too asymmetric, national regulators fail to set up an efficient SPOE resolution regime ex ante. Second, when required ex-post transfers across jurisdictions are too large, national regulators ring-fence local banking assets instead of cooperating in a planned SPOE resolution. In this case, multiple-point-of-entry (MPOE) resolution, where loss-absorbing capacity is pre-assigned to jurisdictions, is more efficient. Our analysis highlights a complementarity between bank resolution and the structure of global banks: the more decentralized a global bank's operations, the greater the relative efficiency of MPOE resolution.
- G2 - Financial Institutions and Services