Working Paper: CEPR ID: DP13831
Authors: Federico Lubello; Ivan Petrella; Emiliano Santoro
Abstract: 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.
Keywords: banking; bank collateral; liquidity; capital misallocation; macroprudential policy
JEL Codes: E32; E44; G21; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increasing the pledgeability of financial assets (G19) | Increase in credit availability (E51) |
| Increase in credit availability (E51) | Reduce the spread between loan and deposit rates (E43) |
| Higher pledgeability (G32) | Reduce capital misallocation (D61) |
| Limited enforceability of deposit contracts (G33) | Counteract effects of limited enforceability of loan contracts (G33) |
| Implementing a countercyclical capital adequacy requirement (E44) | Smooth credit cycles (E32) |