Ninth International Moscow Finance Conference
On October 23-24, 2020, ICEF and the International Laboratory in Financial Economics (LFE) held the Ninth International Moscow Finance Conference (this year online), organized in cooperation with the London School of Economics. First-class international scholars in the field and Moscow-based researchers presented their latest research and provided extensive comments on each other’s work.
Friday, October 23
Speaker: José-Luis Peydró (Imperial College London)
Loan Origination Time and Screening: A New Lending Standard (with Mikel Bedayo, Gabriael Jimenez and Raquel Vegas)
Abstract: We show that loan origination time is crucial for bank lending standards, cycles and failures. We use the credit register from Spain, with the exact time of a loan application and its granting. When VIX is lower (booms), banks shorten loan origination time, especially to riskier firms. Bank incentives (capital and competition) and capacity constraints (applications per branch) are key mechanisms driving results. Moreover, shorter (loan-level) origination time is associated with higher ex-post defaults, also using variation from holidays. Finally, less pre-crisis origination time —more than other lending conditions— is associated with higher bank-level failures in crises, consistent with lower screening.
Discussant: Martin Brown (University of St.Gallen)
Speaker: Elena Loutskina (Darden School of Business Administration, UVA)
Deposit Market Power, Funding Stability and Long-Term Credit (with Lei Li and Philip E. Strahan)
Abstract: This paper shows that by reducing the cyclicality of deposit costs and internal funds (profits), deposit market power reduces banks’ funding risk and provides the flexibility to originate long-term loans. Banks with deposit HHI one standard deviation above average extend loans with about 20% longer maturity than those one standard deviation below average. Deposit market power also allows banks to charge lower maturity premiums. This has real effects: access to banks raising funds in less competitive markets improves growth in bank-dependent borrowers needing long-term finance. Deposit market power, by increasing long-term credit supply, helps alleviate credit cycles.
Discussant: Vladimir Sokolov (ICEF, HSE)
Speaker: Kathy Yuan (LSE)
Dynamic Coordination with Flexible Security Design (with Emre Ozdenoren and Shengxing Zhang)
Abstract: Borrowers obtain liquidity by issuing securities backed by the dividend and resale price of a long-lived collateral asset. Security design alleviates adverse selection in the securities markets arising from borrowers’ private information about the collateral quality. Security design and asset price are inter-dependent. Higher asset price lowers adverse selection in securities and generates more liquidity via a larger debt tranche and vice versa. When restricted to issuing equity only, dynamic feedback between asset price and collateral quality leads to multiple equilibria. Optimal flexible security design eliminates multiple equilibria, improves welfare through inter-temporal coordination, and can be implemented as term repo.
Discussant: Vincent Fardeau (ICEF, HSE)
Speaker: Dmitry Makarov (ICEF, HSE)
On ambiguity-seeking behavior in finance models with smooth ambiguity
Abstract: Ambiguity-seeking behavior is universally disregarded in a large theoretical finance literature with smooth ambiguity preferences. This paper questions the three rationales for this practice. First, smooth ambiguity models are not illdefined under ambiguity-seeking. Second, a representative investor need not be ambiguity-averse when an average individual trader is ambiguity-averse. Third, individual traders need not be ambiguity-averse when a representative investor is ambiguity-averse. Our constructive suggestion is that researchers should calculate the allowed levels of ambiguity-seeking for which their model is wellposed, and then let the data speak for themselves whether ambiguity-seeking or ambiguity-aversion can better explain empirical evidence.
Discussant: Jack Favilukis (Sauder School of Business, UBC)
Saturday, October 24
Key note speech
Speaker: Toni Whited (Ross School of Business, University of Michigan)
Bank Market Power and Risk-Taking
Speaker: Itay Goldstein (Wharton School)
Bank Heterogeneity and Financial Stability (with Alexandr Kopytov, Lin Shen, and Haotian Xiang)
Abstract: We study how heterogeneity in banks' asset holdings affects fragility. In the model, banks face a risk of bank runs and have to liquidate long-term assets in a common market to repay runners. Liquidation prices are depressed when many banks sell their assets at the same time. When banks are homogeneous, their selling behaviors are synchronized, and bank runs are exacerbated. We show that differentiating banks to some extent enhances the stability of all banks, even those whose asset performance ends up being weaker. Our analyses provide new insights about the regulation of banking sector's architecture and the design of government support during crises.
Discussant: Aleh Tsyvinski (Yale University)
Speaker: Sylvain Carre (ICEF, HSE)
Banks as Liquidity Multipliers (with Damien Klossner)
Abstract: Banks hold large amounts of high-quality liquid assets while relying predominantly on deposit funding. The return on these assets is often lower than the cost of deposits. Why do banks engage in such a negative carry trade? Using a novel observation on global games, we build a tractable model where banks manage liquidity risk by adjusting the size of their short-term liabilities and of their liquid reserves consisting of safe, liquid government bonds. Banks are the natural buyers of government bonds because holding these assets enables them to \multiply liquidity": using one unit of bonds to back more than one unit of short-term debt while keeping their liquidity risk unchanged. How much more is measured by the slope of an endogenous iso-risk curve. This liquidity multiplier is key to understand a bank's joint choice of leverage and liquid reserves and how these decisions connect to the pricing of liquid assets. In turn, this provides an explanation of the negative carry puzzle.
Discussant: Haoxiang Zhu (MIT Sloan School of Management)
Speaker: Nadya Malenko (Ross School of Business, University of Michigan)
Corporate governance in the presence of active and passive delegated investment (with Adrian Corum and Andrey Malenko)
Abstract: We examine the governance role of delegated portfolio managers. In our model, investors decide how to allocate their wealth between passive funds, active funds, and private savings, and asset management fees are endogenously determined. Funds’ ownership stakes and asset management fees determine their incentives to engage in governance. Whether passive fund growth improves aggregate governance depends on whether it crowds out private savings or active funds. In the former case, it improves governance even if accompanied by lower passive fund fees, whereas in the latter case, it improves governance only if it does not increase fund investors’ returns too much. Regulations that decrease funds’ costs of engaging in governance may decrease total welfare. Moreover, even when such regulations are welfare improving and increase .rm valuations, they can be opposed by both fund investors and fund managers.
Discussant: Sergey Stepanov (ICEF and FES, HSE)
Speaker: Haoxiang Zhu (MIT Sloan School of Management)
When FinTech Competes for Payment Flows (with Christine A. Parlour and Uday Rajan)
Abstract: We study the impact of FinTech competition in payment services when banks rely on consumers' payment data to obtain information about their credit quality. Competition from FinTech payment providers disrupts this information spillover, reducing the bank's loan quality and profit. FinTech competition benefits consumers with weak bank affinity (financial inclusion improves), but may hurt consumers with strong bank affinity. We consider three regimes in which payment information flows back into the credit market: FinTech lending, data sales, and consumer data portability. All three regimes improve the quality of loans, although their effects for bank profit and consumer welfare are ambiguous. Our results highlight the important and complex trade-off between consumer welfare and the stability of banks following FinTech competition in payment.
Discussant: Alexei Boulatov (ICEF, HSE)
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