Working Paper: NBER ID: w17909
Authors: Charles AE Goodhart; Anil K Kashyap; Dimitrios P Tsomocos; Alexandros P Vardoulakis
Abstract: This paper explores how different types of financial regulation could combat many of the phenomena that were observed in the financial crisis of 2007 to 2009. The primary contribution is the introduction of a model that includes both a banking system and a "shadow banking system" that each help households finance their expenditures. Households sometimes choose to default on their loans, and when they do this triggers forced selling by the shadow banks. Because the forced selling comes when net worth of potential buyers is low, the ensuing price dynamics can be described as a fire sale. The proposed framework can assess five different policy options that officials have advocated for combating defaults, credit crunches and fire sales, namely: limits on loan to value ratios, capital requirements for banks, liquidity coverage ratios for banks, dynamic loan loss provisioning for banks, and margin requirements on repurchase agreements used by shadow banks. The paper aims to develop some general intuition about the interactions between the tools and to determine whether they act as complements and substitutes.
Keywords: No keywords provided
JEL Codes: G38; L51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| financial regulations (G28) | household loan defaults (G51) |
| household loan defaults (G51) | forced selling by shadow banks (E44) |
| forced selling by shadow banks (E44) | price declines (fire sales) (G10) |
| limits on loan-to-value ratios (G21) | incidence of defaults (G33) |
| capital requirements (G32) | stability during downturns (E32) |
| liquidity coverage ratios (G33) | management of short-term funding needs (G21) |