1 / 10

Gerhard Illing LMU Munich University/ CESifo Norges Bank Workshop on

Discussion of Allen, Carletti, Goldstein & Leonello „ Government Guarantees and Financial Stability“. Gerhard Illing LMU Munich University/ CESifo Norges Bank Workshop on Understanding Macroprudential Regulation 29 November, 2012. Central issues.

nicki
Télécharger la présentation

Gerhard Illing LMU Munich University/ CESifo Norges Bank Workshop on

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Discussion of Allen, Carletti, Goldstein & Leonello„Government Guarantees and Financial Stability“ Gerhard Illing LMU Munich University/CESifo Norges Bank Workshop on Understanding Macroprudential Regulation 29 November, 2012

  2. Central issues • How to cope with Moral Hazard effects of public interventions (deposit guarantee schemes)? • Optimal design of Financial Safety Nets? • Challenge: Distinguish between fundamental and panic driven runs (runs due to coordination failure) • Insolvency vs. illiquidity • Panic driven runs: Multiple equilibria ~ how to handle indeterminacy? • Elegant model. Tractable Structure But only first step – some key issues not yet solved

  3. Summary – Model setup • Modeling Strategy: Analyze Public Guarantuee Schemes in Goldstein /Pauzner version of Diamond/Dybvig model • Model allows for both fundamental and panic driven bank runs • Model determines strategies of depositors and banks endogenously • Indeterminacy of multiple equilibria solved by Global Game approach (Goldstein /Pauzner) • Depositors receive noisy signals about fundamentals • Inefficiency if runs are panic driven; Public support improves outcome, but may increase region with fundamental runs beyond “efficient” level

  4. Summary – Model setup • Diamond Dybvig type Deposit contract High return R>1 with p(θ) at date 2θ: state of the economyDepositors get noisy signal: xi= θ+εi • θ high: Good fundamentals - no run (upper dominance); θ≤θ low: bad fundamentals - always run (lower dominance)intermediate range: multiple equilibria; panic runs • Goldstein/Pauzner Global games solution: • Critical θ*: no run above some threshold θ*!Both θ and θ* are increasing in c1In the range θ≤θ≤θ* panic driven runs Interventions can prevent panic runsencourage insurance (higher c1)Moral Hazard: Support may induce „excessive risk“ - shifting θ(c1) upward beyond some optimal level.

  5. Comments • Laissez Faire solution: Banks determine θ*(c1) such that • Marginal gain from better risk sharing (higher c1 for early consumers) equals Marginal loss from increased probability of runs (higher θ*(c1) )c1D • (Constrained) efficient solution: prevent panic runs only fundamental runs;  threshold θ(c1)  c1SP>c1D • Problem: How to avoid panic runs? Costless insurance against panic runs? Implementation mechanism left unclear in the paper: Insure depositors only for θ<θ(c1). Resources needed? • Announcement to repay depositors only if θ <θ(c1) won’t help if private agents cannot observe θ • General Critique: Clear-cut regions of fundamental and panic runs implausible ~~ Too simplified view: In reality, signals provide noisy information about true state of the world  alpha error vs. beta error

  6. Comments • Social planner allows transfer of resources from some public good • Idea: Real deposit insurance in period 1: Guaranteec1SPI>1 in the case of fundamental runs (θ<θ(c1)) • Paid out from funds g available for public goods • Ad hoc modeling strategySince risk averse agents prefer some insurance,why not insure depositors with c1SPI>1 in all states θ? • Why not also insure against bad realization in period 2? • Crucial issue:Resources g modeled as exogenously given; corner solutions g not properly modeled (deus ex machina): Partial equilibrium! Determine investment in g endogenously ex ante (distortionary taxes)Strong incentives to provide insurance pool against systemic risks Why no private insurance (investment in safe assets; equity funds)?

  7. Comments Inefficiencies from public guaranteeschemes • Guarantuees induce moral hazard (excessive risk taking): c1GG >c1SPθ(c1GG)>θ(c1SP). • Externality: • Government provides insurance funds without adequate „pricing,“ taking private deposit contracts c1GG as given;  overinsurance • In line with intuition, but not worked out properly: Characterise efficient pricing strategy as benchmark case~ not done convincingly in the paper (only a first step) Key argument:Cannot prevent banks to offer contractsc1GG >c1SPI • Simple mechanism: Provide deposit insurance only for banks offering contracts with payout c1 ≤c1SPI • Other available options : capital adequacy; liquidity requirements No role in your set-up ~ strong limitation

  8. Comments • Comparison of different public deposit insuranceschemesAll transfer resources from some given public good g to depositors1) Pay out c1D to depositors only at t=1 • 2) Pay out c1D to depositors both at t=1 and t=2 • 3) Insure all deposit claims fully at t=1 and t=2 • Key insight: Optimal scheme depends on size of gIf g is large, full insurance more efficient than moderate intervention • With tight budget (small g), limited intervention allowing panic runs is preferred • Limited insight - Puzzle: How to determine optimal size g? • Very preliminary work

  9. Suggestions • Key problem:Dynamic inconsistency of conditional guaranteeschemes:Incentives to renege on commitment not to intervene • Cao/Illing (2011), JICB Endogenous exposure to systemic risk Banks have incentives to invest excessively in activities prone to systemic risk • Allows to model different regulatory designs Liquidity (and capital adequacy) requirements can address these incentivesDiamond/Dybvig framework less suitable – Sequential Service constraint: Optimality of deposit contracts?

  10. Minor comments: Analysis incomplete: Compare c1SPIrelative to c1SP ? Upper dominance region: Same return R at date 1 and 2 ~ contradicts initial claims

More Related