Financial Crises and the Transmission of Shocks (Hosted by U.S. Office of Financial Research)
Saturday, Jan. 7, 2017 8:00 AM – 10:00 AM
Sheraton Grand Chicago, Chicago Ballroom IX
- Chair: Stacey Schreft, U.S. Office of Financial Research
Competition, Reach for Yield, and Money Market Funds
AbstractDo asset managers reach for yield because of competitive pressures in a low interest rate environment? I propose a tournament model of money market funds (MMFs) to study this issue. When funds care about relative performance, an increase in the risk premium leads funds with lower default costs to increase risk-taking, while funds with higher default costs decrease risk-taking. Without changes in the premium, lower risk-free rates reduce the risk-taking of all funds. I show that these predictions are consistent with MMF risk-taking during the 2002-2008 period and that rank-based performance is indeed a key determinant of money flows to MMFs.
Asset Encumbrance, Bank Funding and Fragility
AbstractWe offer a model of asset encumbrance by banks subject to rollover risk and study how secured debt issuance influences fragility, funding costs, and welfare. A banker encumbers assets to trade off expanding profitable investment funded with secured debt with greater fragility due to unsecured debt runs. We derive several testable implications about the privately optimal level of encumbrance. A constrained planner encumbers more assets, since the bankruptcy-remote pool of assets satisfies a demand for safety. We evaluate the efficacy of policy tools aimed at boosting private encumbrance levels, including interest rate cuts, capital injections, guarantees, lender of last resort, and stable funding ratios.
Federal Reserve Bank of New York
University of Pennsylvania
- G2 - Financial Institutions and Services