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A NOTE ON CREDIT RISK TRANSFER AND THE MACROECONOMY

Published online by Cambridge University Press:  01 March 2018

Ester Faia
Ester Faia*
Affiliation:
Goethe University Frankfurt and CEPR
*
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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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.

Keywords

Credit Risk TransferInformational ExternalitiesCapital Recycling
Type
Note
Information
Macroeconomic Dynamics , Volume 22 , Issue 4 , June 2018 , pp. 1096 - 1111
Copyright
Copyright © Cambridge University Press 2018 

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Footnotes

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

References

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