Forthcoming publication by Federico Lubello ’12 (Economics)
My paper, “Bank Assets, Liquidity and Credit Cycles” with Ivan Petrella (Warwick and CEPR) and Emiliano Santoro (University of Copenhagen) has been accepted at the Journal of Economic Dynamics and Control. In the paper, we uncover a close connection between the collateralization of bank loans, macroeconomic amplification and the degree of procyclicality of bank leverage.
We study how bank collateral assets and their pledgeability affect the amplitude of credit cycles. To this end, we develop a tractable model where bankers intermediate funds between savers and borrowers. If bankers default, savers acquire the right to liquidate bankers’ assets. However, due to the vertically integrated structure of our credit economy, savers anticipate that liquidating financial assets (i.e., loans) is conditional on borrowers being solvent on their debt obligations. This friction limits the collateralization of bankers’ financial assets beyond that of real assets (i.e., capital). In this context, increasing the pledgeability of financial assets eases more credit and reduces the spread between the loan and the deposit rate, thus attenuating capital misallocation as it typically emerges in credit economies à la Kiyotaki and Moore (1997). We uncover a close connection between the collateralization of bank loans, macroeconomic amplification and the degree of procyclicality of bank leverage.
We’ve just come across some articles written by several Barcelona GSE Alumni who are now Research Assistants and Economists at Caixabank Research in Barcelona. New articles are published each month on a range of topics.
Below is a list of all the alumni we found listed as article contributors, as well as their most recent publications in English (click each author to view his or her full list of articles in English, Catalan, and Spanish).
If you’re an alum and you’re also writing about Economics, let us know where we can find your stuff!
Gerard Arqué (Master’s in Macroeconomic Policy and Financial Markets ’09)
Arturo Pallardó ’15 (Master in Economics) and Christopher Gandrud (Lecturer, City University London) have put together a summary of the European multilevel bank regulatory structure.
The health of the European banking system has come back into the media spotlight. The recent fall in bank shares; the creation of the Italian “bad bank”; and Britain’s demands to shield its banks from rules governing the euro region; suggest that the debate on the design and functioning of the European banking regulatory architecture will be on the table in the following months.
Given the complex and evolving nature of European banking regulation, there is much confusion about what has already been established and what plans are being discussed. We hope to clarify the current and proposed state of the European bank regulatory architecture. We differentiate which rules and institutions form the so-called “banking union” and which rules are part of the more general EU single market for financial services.
Economics alum Arturo Pallardó ’15 has created a new website to follow the evolution of the European banking union.
Arturo Pallardó (Master in Economics ’15) is the creator of the @bankingunion_eu Twitter account and has just launched a new website to follow the evolution of the European banking union. Here he tells Barcelona GSE Voice readers about the project:
As expressed by the European Central Bank, the construction of a banking union emerged from the financial crisis of 2008 and the subsequent sovereign debt crisis: “It became clear that, especially in a monetary union such as the euro area, problems caused by close links between public sector finances and the banking sector can easily spill over national borders and cause financial distress in other EU countries”.
However, this European project is still under construction. The ultimate goal of this www.bankingunion.eu website is to gather and structure banking union-related documents, from legislative acts to research papers, while fostering the debate on those issues that are unfinished.
Meanwhile, in the current beta version of the web the reader will find different interviews with academics, researchers and professionals discussing some of these banking union topics.
Thomas Walsh ’14 is a Research Assistant at Bruegel and graduate of the Barcelona GSE Master in Macroeconomic Policy and Financial Markets. His recent post on the think tank’s blog, co-authored with Research Fellow Grégory Claeys, examines recovery numbers for countries coming out of deep recessions:
The recovery in certain economies (particularly in the Baltics and more recently in the UK or Spain) is often attributed to decisive economic policies (e.g. quick structural adjustment in Latvia, quantitative easing in the UK or labour market reforms more recently in Spain). While this view may be true, a theory suggested by Milton Friedman in 1964 (and revisited in 1993) proposes a complementary hypothesis: these strong recoveries are just natural after particularly deep recessions…
At the Rényi Hour on November 20th, Samantha Cook presented her recent research on the description and categorisation of the global SWIFT (Society for Worldwide Interbank Financial Telecommunication) interbank network. Samantha is currently the Chief Scientist at Financial Network Analytics in Barcelona. Previously, she was a Quantitative Analyst at Google’s Research Group in New York and a professor at Columbia University in New York and Pompeu Fabra University in Barcelona.
The study focused on understanding the underlying structure of a network of messages between financial institutions in different countries. It looked at how the network was affected by various recent economic events and evaluated the robustness of the system over time.
The data set underpinning the study contains standard MT103 SWIFT messages from 1 January 2003 and 31 July 2013, a period characterised by extreme economic turmoil. Each message represents a single customer credit transfer from bank to bank. The data is aggregated at the country level.
Samantha showed us different statistical analyses of the data set. The analysis of the data in terms of a complex weighted network was particularly interesting. In the network, each node represented a country and the edges connecting two different nodes were weighted according to the amount of messages those country exchanged in a given time period. The resulting network follows approximately a Core-Peripheral structure, that is, some nodes are fully connected with each other (the so-called core) while some others are mostly connected only to a node of the core: these are the peripheral nodes. Interestingly, events such as the introduction of new regulations or the beginning of the financial crisis was clearly reflected in the links and even more striking this network structure was resilient during the period studied. This work showcases a novel approach to understanding the structure of the complex financial system and the findings may provide a way to help improve the global service.
The discussion also identified some opportunities for further research. For example, we discussed why the degree distribution does not behaves as other related financial networks, and why the number of links decreases while the number of messages has a clearly increasing trend. These questions, and others that emerge, may provide ideas for further research and modelling work in this area.
Editor’s note: This post is part of a series showcasing Barcelona GSE master projects by students in the Class of 2014. The project is a required component of every master program.
Too-many-to-fail: a theoretical approach
The recent financial crisis has generated enormous economic and human costs. New regulatory framework has been proposed in order to provide banks with better incentives.
My goal in this project is to theoretically explain several market failures that happened prior to the financial crisis and propose a model that captures these phenomena in the banking sector. To end up, I suggest different macroprudential measures that could be undertaken with the ultimate objective of providing a more stable financial system.
In this model, as well as those concepts Jackson discussed in the broader discussion on networks, we have the concepts of diversification and integration to separate the breadth and depth of connectivity of one organisation to others. A company/organisation/ country with many connections to others would be highly diversified; where those interests represented a higher proportion of their overall connectivity, they would be highly integrated. Continue reading “Networks and Contagion in Financial Markets”
We all know we’re only 7 steps away from Jonny Depp. Or Obama. Or Lionel Messi (maybe, quite literally if you’re here at the GSE.) However, the world is not only small; it is shrinking. We are becoming more interconnected through new forms of communication. We find out information through these networks, which then influences our decisions. What we do, therefore, is influenced by whom we know.
Matt Jackson at Stanford University has been analysing the increasing connectedness of the world and its implications on spreading information, and came to Barcelona to explain his findings at the UPF opening ceremony. (And there we were thinking we’d been here so long, you could look us up on the book directory at the library and know where to find us.)
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