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SUMMARY:Intermediary Leverage Cycles and Financial Stability - Boyarchenko
 \, N (Federal Reserve Bank of New York)
DTSTART:20140826T133000Z
DTEND:20140826T140000Z
UID:TALK53877@talks.cam.ac.uk
CONTACT:Mustapha Amrani
DESCRIPTION:We present a theory of financial intermediary leverage cycles 
 within a dynamic model of the macroeconomy. Intermediaries face risk based
  funding constraints that give rise to procyclical leverage and a procycli
 cal share of intermediated credit. The pricing of risk varies as a functio
 n of intermediary leverage\, and asset return exposures to intermediary le
 verage shocks earn a positive risk premium. Relative to an economy with co
 nstant leverage\, financial intermediaries generate higher consumption gro
 wth and lower consumption volatility in normal times\, at the cost of endo
 genous systemic financial risk. The severity of systemic crisis depends on
  intermediaries' leverage and net worth. Regulations that tighten funding 
 constraints affect the systemic risk-return trade-off by lowering the like
 lihood of systemic crises at the cost of higher pricing of risk. When the 
 regulator's tool-kit is expanded to include a liquidity ratio\, liquidity 
 requirements are preferable to capital requirements\, as tightening liquid
 ity requirements lowers the likelihood of systemic distress without impair
 ing consumption growth. Finally\, we show that in a model with two types o
 f intermediaries - a "bank" facing risk-based constraints and a "fund" fac
 ing skin-in-the-game constraints - bank sector growth leads total financia
 l sector asset growth\, while growth of the fund sector does not\, which i
 s a feature we confirm in the data.\n
LOCATION:Seminar Room 1\, Newton Institute
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