TY - JOUR
T1 - Long-term bank lending and the transfer of aggregate risk
AU - Reiter, Michael
AU - Zessner-Spitzenberg, Leopold
N1 - Funding Information:
We thank two anonymous referees and the associate editor for very instructive comments and criticism, and Philippe Bacchetta, Charles Calomiris, Fabrice Collard, Tom Cooley, Florian Exler, Thomas Gehrig, Joachim Jungherr, Anton Korinek, Michael Kumhof, Iacopo Morchio, Paul Pichler, Hugo Rodriguez, Martin Summer, Oreste Tristani, Stijn Van Nieuwerburgh, Pablo Winant, Martin Wolf, conference participants at the ECB, the Barcelona GSE Summer Forum 2017, and seminar participants at the University of Vienna and the Humboldt University of Berlin for useful comments and discussions. The authors gratefully acknowledge the financial support by the Austrian Science Fund (FWF) Grant no. I 3840-G27 . Leopold Zessner-Spitzenberg further gratefully acknowledges the financial support by the Vienna Graduate School of Economics funded by the FWF: W 1264 Doktoratskollegs (DKs).
Funding Information:
We thank two anonymous referees and the associate editor for very instructive comments and criticism, and Philippe Bacchetta, Charles Calomiris, Fabrice Collard, Tom Cooley, Florian Exler, Thomas Gehrig, Joachim Jungherr, Anton Korinek, Michael Kumhof, Iacopo Morchio, Paul Pichler, Hugo Rodriguez, Martin Summer, Oreste Tristani, Stijn Van Nieuwerburgh, Pablo Winant, Martin Wolf, conference participants at the ECB, the Barcelona GSE Summer Forum 2017, and seminar participants at the University of Vienna and the Humboldt University of Berlin for useful comments and discussions. The authors gratefully acknowledge the financial support by the Austrian Science Fund (FWF) Grant no. I 3840-G27. Leopold Zessner-Spitzenberg further gratefully acknowledges the financial support by the Vienna Graduate School of Economics funded by the FWF: W 1264 Doktoratskollegs (DKs).
Publisher Copyright:
© 2023
PY - 2023/6
Y1 - 2023/6
N2 - Long-term loan contracts transfer aggregate risk from borrowing firms to lending banks. When aggregate shocks increase the future default probability of firms, banks are not compensated for the rising default risk of existing contracts. The flip side is that firms benefit from not facing higher interest rates in recessions. If banks are highly leveraged, this can lead to financial instability with severe repercussions in the real economy. If banks are well capitalized, the risk transfer stabilizes the economy. To study this mechanism quantitatively, we build a macroeconomic model of financial intermediation with long-term defaultable loan contracts and calibrate it to match aggregate firm and bank exposure to business cycle risks in the US. We find that moving from Basel II to Basel III capital regulation eliminates banking crises, increases output in the long run and improves welfare.
AB - Long-term loan contracts transfer aggregate risk from borrowing firms to lending banks. When aggregate shocks increase the future default probability of firms, banks are not compensated for the rising default risk of existing contracts. The flip side is that firms benefit from not facing higher interest rates in recessions. If banks are highly leveraged, this can lead to financial instability with severe repercussions in the real economy. If banks are well capitalized, the risk transfer stabilizes the economy. To study this mechanism quantitatively, we build a macroeconomic model of financial intermediation with long-term defaultable loan contracts and calibrate it to match aggregate firm and bank exposure to business cycle risks in the US. We find that moving from Basel II to Basel III capital regulation eliminates banking crises, increases output in the long run and improves welfare.
KW - Banking
KW - Financial frictions
KW - Maturity transformation
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U2 - 10.1016/j.jedc.2023.104651
DO - 10.1016/j.jedc.2023.104651
M3 - Article
AN - SCOPUS:85153030750
SN - 0165-1889
VL - 151
JO - Journal of Economic Dynamics and Control
JF - Journal of Economic Dynamics and Control
M1 - 104651
ER -