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A NOTE ON CREDIT RISK TRANSFER AND THE MACROECONOMY

  • Ester Faia (a1)

Abstract

The recent financial crisis highlighted the limits of the originate to distribute model of banking, but its nexus with the macroeconomy remains unexplored. I build a business cycle model with banks engaging in credit risk transfer (CRT) under informational externalities. Markets for CRT provide liquidity insurance to banks, but the emergence of a pooling equilibrium can also impair the banks' monitoring incentives. In normal times and in face of standard macro shocks the insurance benefits of CRT prevail and the business cycle is stabilized. In face of financial/liquidity shocks the extent of informational asymmetries is larger and the business cycle is amplified. The macro model with CRT can also reproduce well a number of macro and banking statistics over the period of rapid growth of this banks' business model.

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Corresponding author

Address correspondence to: Ester Faia, Goethe University Frankfurt, House of Finance, Theodor Adorno Platz 3, 60323, Frankfurt am Main, Germany; e-mail: faia@wiwi.uni-frankfurt.de; www.wiwi.uni-frankfurt.de/profs/faia.

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I gratefully acknowledge financial support from the Lamfalussy award of the European Central Bank. I thank participants at various conferences and seminars.

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References

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A NOTE ON CREDIT RISK TRANSFER AND THE MACROECONOMY

  • Ester Faia (a1)

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