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European Banking Challenges Anil K Kashyap faculty.chicagobooth/anil.kashyap /

European Banking Challenges Anil K Kashyap http://faculty.chicagobooth.edu/anil.kashyap / July 12, 2012 My take on the crisis Four questions that result from that: A unified model for bank regulation Prioritizing and calibrating regulatory tools Improving stress tests

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European Banking Challenges Anil K Kashyap faculty.chicagobooth/anil.kashyap /

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  1. European Banking Challenges • Anil K Kashyap • http://faculty.chicagobooth.edu/anil.kashyap/ • July 12, 2012 • My take on the crisis • Four questions that result from that: • A unified model for bank regulation • Prioritizing and calibrating regulatory tools • Improving stress tests • What to do about run prone business models

  2. Component 1 of the crisis: Runs • The crisis featured 5 non-traditional runs that mostly caught us by surprise: • ABCP • Repo (specifically regarding Bear Stearns) • OTC customers • Prime Brokerage customers • MMMFs

  3. Component 2 of the crisis: Deleveraging • Deleveraging is critical because • Explains the amplification of the initial subprime shock • Explains the pervasive fire sales in fall 2008 • Hunch: it has something to do with the slow recovery, from both the household side and the corporate side • What is the mechanism that explains Reinhart-Rogoff?

  4. Question 1: Modeling • What is the right model for nesting fire sales, deleveraging and default? • My answer is that work on financial frictions ought concentrate on “credit supply” problems, but that still leaves lots of unanswered issues.

  5. Question 2: Regulatory Tools • How do we pick between capital, liquidity, loan to value, debt to income, haircuts/margins, dynamic provisioning, deposit insurance, taxes? • Which bundles work best together? • How do we calibrate the settings? • My provisional answer: think about markets channels through which tools operate, not the agents on which they bind.

  6. Question 3: Stress Tests • Was the SCAP lucky or best practice? US banks raised equity, Europeans have not. Why? • The resolved asymmetric information • The public backstop in the US was key • Chris Dodd’s threat of restricting pay • My provisional answer, definitely not asymmetric information

  7. Question 4: Broken Business models • Global regulation has gotten bogged down tackling run prone business models • MMMFs (a well funded menace) • Prime Brokerage • MMMFs need capital or variable NAV • Primer Brokerage is harder to fix, what is the social value of collateral (and do we have enough safe assets)?

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