General Equilibrium Models in the Banking System | Hanlon Financial Systems Center

General Equilibrium Models in the Banking System

General Equilibrium Models in the Banking System

seminar date: 
Thursday, October 8, 2015 - 6:00pm
seminar location: 
BC122
Amir Khalilzadeh, NYU
Abstract: 

We describe a dynamic macroeconomic model with a financial sector which consists of two types of banks and an interbank market. Unlike other macro models in the literature we focus on the frictions in the interbank market and investigate the leverage behavior of the banks during the crisis. Merchant bank and deposit bank optimally determine their leverage and their cash holding, and may default endogenously. The merchant bank can default when the value of its assets, used as collateral, falls below an endogenous threshold. Subsequently, the deposit bank can default when the loss on the interbank loans exceeds a certain threshold. The risk premium paid by the merchant bank on its interbank loan and the insurance premium paid by the deposit bank on its deposits are optimally determined at the equilibrium. In the comparative static analysis, for a given macroeconomic environment, we evaluate the optimal decisions of the banks and the subsequent impact on their balance sheet by changing the key parameters, namely securities volatility, fire sale cost and liquidation cost.

This framework highlights the micro-foundation of capital shortfall which we define as stressed expected loss (SEL) on liabilities of the deposit bank. This corresponds to the cost taxpayer have to pay on the default of deposit bank. The calibration of the model, based on U.S. estimates, results in a SEL in a market crash as high as 17.8% of the ex-ante assets (or 80.7% of the ex-ante equity) of the bank. Finally, we argue that imposing a minimum of cash holding by the bank allows for a considerable reduction in the SEL.

 

Bio: 

Amir is a fourth year PhD candidate at Institute of Banking and Finance of HEC Lausanne in Switzerland. Currently he is visiting the Volatility Institute and Finance department at NYU Stern. His research is primarily in the area of financial intermediation with a focus on financial stability and systemic risk. Prior to starting his PhD, Amir did undergraduate and graduate study in Statistics in Iran and worked as a researcher at the Tehran Stock Exchange. He also holds a master’s degree in Financial Mathematics from Uppsala University in Sweden.