Crisi - Monacelli

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T. Monacelli descrive l' origine dalla crisi finanziaria


<p>Financial Crisis: Credit Booms, Asset Prices and ExternalitiesTommaso Monacelli Universit Bocconi and IGIER NfA Days - June 2009</p> <p>Things that typify a nancial crisis</p> <p>1. Credit boom ! Leveraging of nancial institutions 2. Asset price boom/bubble</p> <p>3. Asset price bust ! De-leveraging of banks</p> <p>Questions</p> <p>1. What causes the credit boom?</p> <p>2. Is the credit boom a good thing?</p> <p>3. What causes asset prices to go bust and the crisis thereafter?</p> <p>4. Why is the crisis of 2008 so much worse than the dotcom bust of 2001?</p> <p>Causes of crisis</p> <p>1. Global imbalance ! capital from asian countries pour into assets in Western countries ! low risk spreads 2. Monetary policy! Kept interest rates too low 3. Structured nance ! the role of securitization</p> <p>shock recente</p> <p>rates go up during subprime shock</p> <p>Housing boom in many countries with different monetary policies</p> <p>What is securitization?</p> <p>Securitization: good idea ! allows to transform illiquid asset (royalties) into liquid asset</p> <p>How does it work with structured nance?</p> <p>The magic of securitization</p> <p>Suppose two identical bonds, each with probability of NOT default = 0:9 ! prob. default = 1 0:9 = 0:1 NB: prob. default uncorrelated!</p> <p>Combine them in a CDO (collateralized debt obligation)</p> <p>1. Junior tranche: pay if both tranches do not default</p> <p>2. Senior tranche: defaults only if both default</p> <p>junior senior</p> <p>PAY 0:92 = 0:81 0:99</p> <p>DEFAULT 1 0:81 = 0:19 (1 0:9)2 = 0:01</p> <p>!Result: credit enhancement for the senior tranche !"Side eect": tranches become correlated even if underlying assets are not</p> <p>The trick: can expand to three bonds</p> <p>1. "Junior": pay if NO tranches default</p> <p>2. "Mezzanine": defaults if at least two default</p> <p>3. "Senior": defaults if all default</p> <p>junior mezzanine senior</p> <p>PAY 0:729 0:972 0:999</p> <p>DEFAULT 0:271 0:028 0:001</p> <p>could combine in a CDO squared</p> <p>!Result: credit enhancement for both senior and mezzanine tranches (2/3 of the capital) !Easy to get AAA rating</p> <p>Fraction of AAA rated structured products 60% corporate bonds 1%</p> <p>(source Fitch, 07)</p> <p>But to assign rating need an assessment on the joint default correlations</p> <p>The higher the default correlation ! the more likely it is that all assets default simultaneously ! the more risky the senior tranches</p> <p>The role of rating agencies</p> <p>They tell us that this "AA General Electric bond" is more likely to default than that "A+ General Motors bond"</p> <p>No information on whether that bond is particularly likely to default at the same time that there is a large decline in the stock market or a recession</p> <p>Implications</p> <p>Pooling of mortgages reduces the default risk of individual tranches but it increases the correlation to general economic conditions.</p> <p>Why? Because tranches become correlated even if underlying assets are not</p> <p>Result: "AAA CDO" more subject to systemic risk than a single "AAA corporate bond"</p> <p>Paradox of securitization</p> <p>1. Increase diversication of idiosyncratic risk, but..</p> <p>2. Increase sensitivity to aggregate risk</p> <p>Risk diversication: earn a premium most of the time and face (catastrophic) losses only in the rare event that the AAA rated tranche gets hit</p> <p>AAA tranches hit when aggregate ("systemic") shocks hit...</p> <p>AND INDEED IT DID HIT..!</p> <p>Securitization has been around for a long time</p> <p>Why housing market collapse generated a much more severe and systemic crisis relative to the dot-com burst of 2000?</p> <p>1. Housing wealth more signicant portion of household wealth s</p> <p>2. From 2002 to 2007 a deterioration of loan quality</p> <p>3. Securitization had perverse eect: concentrated rather than diversify risk in the hands of banks</p> <p>Why did securitization work in such a perverse way?</p> <p>1. Banks temporarily placed assets o balance sheets ! Get around capital requirements</p> <p>2. Regulation allowed banks to hold less capital if assets on balance sheets were AAA rated</p> <p>!In a nutshell: securitization lost its soul ! Especially btw. 2002 and 2007 worked more as a way to circumvent regulation than to diversify risk</p> <p>Paradox: things went badly not because of too much but because of too little securitization!</p> <p>Still open: why did banks take such a huge bet on the real estate market?</p> <p>1. Governance: compensation of bankers and wrong incentives ! Large share of cash bonuses linked to short-term prots</p> <p>2. Government guarantess ! Moral hazard 3. Externality</p> <p>What do we mean by externality?</p> <p>Bank does not internalize aggregate ("general equilibrium") eects on asset prices of individual nancial decisions</p> <p>In their leverage policy bank takes asset prices as given</p> <p>Does not internalize that when things go bad ! will have to re sale assets ! depress prices ! adverse balance sheet eects for all banks</p> <p>"Fire- sale" externality</p> <p>Private valuation of liquidity too high in good times and too low in bad times</p> <p>Trade-o between high investment ex-ante and high-volatility ex-post</p> <p>For nerds..</p> <p>1. Why are credit booms ine cient even when ancial frictions are in place?</p> <p>(i) too much borrowing relative to constrained e cient. (ii) too little relative to 1st best (due to credit frictions)</p> <p>2. Why doesn economy replicate 1-st best even though full insurance availt able?</p> <p>- Individually optimal to take on (socially) excessive risk taking</p> <p>- Why? Take asset prices as given !Do not internalize that in bad states will have to re-sale assets !depress prices !adverse balance-sheet eects 3. Why nancial frictions necessary (but not su cient)? Need balance sheet eects</p> <p>Useful constrast (I)</p> <p>1. Externality vs. bubble</p> <p>- Not a bubble story - Bubble could complement the story !Endogenize bad state = realization of aggregate shock = fall in asset prices</p> <p>Useful constrast (II)</p> <p>2. Externality vs. moral hazard</p> <p>(i) Literature on anticipated bailouts in EM countries (Ranciere-Tornell 2008)!"Too much insurance" source of nancial crisis</p> <p>(ii) Here anticipated bailouts irrelevant</p> <p>What is this capturing of the crisis?</p> <p>Key element in the crisis: liquidity problem for new nancial intermediaries Assets long-term loans MBS Liabilities deposits short-term debt</p> <p>traditional banks investm. banks</p> <p>Inv. banks held long-term assets (e.g., MBS) nanced via short-term debt (e.g., commercial paper) !Maturity mismatch When things deteriorate it is the liquidity problem that matters</p> <p>Bad state</p> <p>!Financial .conditions deteriorate !Lenders reduce exposure !Ask to service debt ! Banks try to re sale long-term illiquid assets</p> <p>Hence two problems</p> <p>1. Excess leverage (due to externality)</p> <p>2. Market liquidity</p> <p>Optimal policy</p> <p>1. Ex post: during a nancial crises prevent re sale (capitalize banks, stabilize asset prices)</p> <p>But this would not prevent overborrowing in the rst place</p> <p>Optimal policy (continued)</p> <p>2. Ex-ante: need to align the valuation of liquidity between individual intermediaries and social planner</p> <p>!Pigou-tax argument</p> <p>Can capital requirements do it?</p> <p>(i) Yes: but need to be targeted to aggregate/systemic risk ! Very di cult (probably need close to 100%) (ii) Problem with Basle II: target individual risk ! incentive VaR!Argument for mandatory "systemic VaR" practices</p> <p>Optimal policy (continued)</p> <p>3. What about monetary policy?</p> <p>Improve on constrained e ciency: intervene in asset markets</p> <p>Optimal open market operations</p> <p>bad state ! market liquidity deteriorates ! CB purchases equity in exchange of money ! increase rate of return on equities</p> <p>But what about normal times?</p> <p>Should MP worry about crisis states in normal times?</p> <p>Could we design a systematic MP that prevent borrowing constraints to become binding?</p> <p>Should optimal systematic monetary policy target asset prices? (Most probably not)</p> <p>Has more predictable monetary policy contributed in any way to excessive risk taking?</p>