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Regular version of the site

The First International Moscow Finance Conference. November 18-19, 2011

10.00 Public Lecture (Room G-313)

Yuliy Sannikov

Princeton University

Macroeconomics with Financial Frictions: Endogenous Risk, Instability and Nonlinearities

Classical macroeconomic models with financial frictions, including work of Bernanke-Gertler-Gilchrist and Kiyotaki-Moore, have uncovered how macroeconomic shocks can be amplified through price effects. A shock to intermediaries balance sheets causes them to adjust risk exposures, leading to asset sales, price impact, and further deterioration of balance sheets. This feedback loop creates excess volatility, which is called endogenous risk. While classical models study linear approximations of these effects, recent research and experience suggest that equilibrium dynamics can be highly nonlinear. While normal times may be very stable, a large enough shock may put the financial system in an unstable regime, where amplification and endogenous risk are much greater.

17.30 Public Lecture (Room G-313)

Arnoud Boot

University of Amsterdam

Banking at the Crossroads: How to deal with Marketability and Complexity?

The objective of this lecture is to address some key issues affecting the stability of financial institutions. The emphasis is on the microeconomics of banking: what type of incentives do financial institutions have in the current landscape? And what does this imply for regulation and supervision? The analysis is motivated by the proliferation of financial innovations and their impact on the financial services industry. A fundamental feature of more recent financial innovations is their focus on augmenting marketability. Marketability has led to a strong growth of transaction-oriented banking (trading and financial market activities). This is at least in part facilitated by the scalability of this activity (contrary to relationship banking activities). It is argued that the more intertwined nature of banks and financial markets induces opportunistic decision making and herding behavior. In doing so, it has exposed banks to the boom and bust nature of financial markets and has augmented instability.
Building on this, we discuss the incentives of individual financial institutions. Issues addressed include: frictions between relationship banking and transaction activities that are more financial market focused, ownership structure issues, the impact of the cost of capital, the effectiveness of market discipline, and what configuration of the industry can be expected. We will argue that market forces might be at odds with financial stability.
The current “eurocrisis” is very much also a banking crisis. The intertwined euro/bank arrangements have enormously complicated the euroland problems, and no easy solutions are available. The lecture concludes with proposals for institutional and regulatory changes that might be needed to deal with the complexity of financial institutions.

 

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