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Macroprudential Policy and Banking Panics

Paper Session

Saturday, Jan. 6, 2018 10:15 AM - 12:15 PM

Pennsylvania Convention Center, 202-B
Hosted By: American Economic Association
  • Chair: Caleb Stroup, Davidson College

Macroprudential Policy with Liquidity Panics

Daniel Garcia-Macia
International Monetary Fund
Alonso Villacorta
Stanford University


We analyze the optimality of macroprudential policies in an environment where the role of the banking sector is to efficiently allocate liquid assets across firms. Informational frictions in the banking sector can lead to an interbank market freeze. Firms react to the breakdown of the banking system by inefficiently accumulating liquid assets by themselves. This reduces the demand for bank loans and bank profits, which further disrupts the financial sector and increases the probability of a freeze, inducing firms to hoard even more liquid assets. Liquidity panics provide a new rationale for stricter liquidity requirements, as this policy alleviates the informational frictions in the banking sector and paradoxically can end up increasing aggregate investment. On the contrary, policies encouraging bank lending can have the opposite effect.

Markets, Banks and Shadow Banks

Rafael Repullo
David Martinez-Miera
University Carlos III of Madrid


The aftermath of the recent financial crisis resulted in a widespread adoption of tougher banking regulation, exemplified by the 2010 agreement of the Basel Committee on Banking Supervision, known as Basel III. However, a concern has emerged about the possibility that the effects of new regulations may be hindered by a shift of intermediation away from the regulated banks and into the shadow banking system. This paper proposes an analytical framework to understand the effects of different types of bank capital requirements on the structure and risk of the financial system. Banks intermediate between entrepreneurs and investors, and can monitor entrepreneurs' projects. Monitoring is not observed by investors, so there is a moral hazard problem. Banks choose whether to be subject to the regulation, in which case a supervisor certifies their capital, or not be subject to it, in which case they have to resort to more expensive private certification. Market finance, regulated banks, and shadow banks can coexist in equilibrium. Under both flat and risk-based capital requirements, safer entrepreneurs borrow from the market and riskier entrepreneurs borrow from intermediaries. The difference is that flat (risk-based) requirements are especially costly for relatively safe (risky) entrepreneurs which may be better off borrowing from shadow banks. We compare these regulations in terms of welfare, and characterize the optimal requirements taking into account the existence of both market and shadow bank finance.

Anatomy of a Bank Panic in an Opaque Banking Sector: Who Sees What Why

Lucy Chernykh
Clemson University
Sergey Mityakov
Clemson University


We study determinants of behavior of depositors during a bank panic. We use detailed high-frequency data on wire transfers to explore the response of different groups of institutional depositors to the publicly and privately observed information about bank closure risk. As a laboratory for our study we consider bank panic in Russia during the Summer 2004, which was triggered by unexpected announcement by the Central Bank to close down banks involved in suspicious money laundering and offshore operations. We find that only depositors with a strong business connection to a given bank respond to privately available information about bank’s involvement in suspicious offshore activities. There is also a notable heterogeneity in informed depositors’ withdrawal patterns: depositors that are themselves involved in suspicious operations (like offshore activities and/or tax evasion) intensify the inflows of funds into offshore active banks during the panic, while sound depositors tend to cut ties with suspicious banks. We also find that uninformed depositors (i.e. those without a close business connection to a given bank) seem to partially uncover private information about the bank risk, as they base their withdrawals on prior period withdrawals by informed depositors. Finally, we present evidence of flight to safety during the bank panic, as depositors tend to transfer the funds into banks with higher pre-crisis capital adequacy ratios. Notably, this effect is stronger for uninformed depositors.
JEL Classifications
  • G1 - General Financial Markets
  • G2 - Financial Institutions and Services