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Credit risk transfers and the macroeconomy

Author

Listed:
  • Faia, Ester

Abstract

The recent financial crisis has highlighted the limits of the 'originate to distribute' model of banking, but its nexus with the macroeconomy and monetary policy remains unexplored. I build a DSGE model with banks (along the lines of Holmström and Tirole [28] and Parlour and Plantin [39] and examine its properties with and without active secondary markets for credit risk transfer. The possibility of transferring credit reduces the impact of liquidity shocks on bank balance sheets, but also reduces the bank incentive to monitor. As a result, secondary markets allow to release bank capital and exacerbate the effect of productivity and other macroeconomic shocks on output and inflation. By offering a possibility of capital recycling and by reducing bank monitoring, secondary credit markets in general equilibrium allow banks to take on more risk.

Suggested Citation

  • Faia, Ester, 2010. "Credit risk transfers and the macroeconomy," CFS Working Paper Series 2010/26, Center for Financial Studies (CFS).
    • Handle: RePEc:zbw:cfswop:201026
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    Cited by:

    1. Haavio, Markus & Ripatti, Antti & Takalo, Tuomas, 2016. "Saving Wall Street or main street," Bank of Finland Research Discussion Papers 12/2016, Bank of Finland.
    2. Radde, Sören, 2012. "Liquidity Crises, Banking, and the Great Recession," VfS Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 65408, Verein für Socialpolitik / German Economic Association.
    3. Radde, Sören, 2015. "Flight to liquidity and the Great Recession," Journal of Banking & Finance, Elsevier, vol. 54(C), pages 192-207.
    4. Eleni Iliopulos & Thepthida Sopraseuth, 2012. "L'intermédiation financière dans l'analyse macroéconomique : le défi de la crise," Économie et Statistique, Programme National Persée, vol. 451(1), pages 91-130.
    5. Francesco Ferrante, 2018. "A Model of Endogenous Loan Quality and the Collapse of the Shadow Banking System," American Economic Journal: Macroeconomics, American Economic Association, vol. 10(4), pages 152-201, October.
    6. Silvo, Aino, 2018. "Information and credit cycles: Causes and consequences of financial instability," Bank of Finland Scientific Monographs, Bank of Finland, volume 0, number e52, December.
    7. Silvo, Aino, 2016. "The interaction of monetary and macroprudential policies in economic stabilisation," Research Discussion Papers 1/2016, Bank of Finland.
    8. repec:hal:psewpa:halshs-00744047 is not listed on IDEAS
    9. Emerson Abraham Jackson & Edmund Tamuke, 2022. "Credit Risk Management and the Financial Performance of Domiciled Banks in Sierra Leone: An Empirical Analysis," Journal of Economic Policy Researches, Istanbul University, Faculty of Economics, vol. 9(1), pages 139-164, January.
    10. Anna Grodecka‐Messi, 2019. "Subprime borrowers, securitization and the transmission of business cycles," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 52(4), pages 1600-1654, November.
    11. Haavio, Markus & Ripatti, Antti & Takalo, Tuomas, 2016. "Saving Wall Street or main street," Research Discussion Papers 12/2016, Bank of Finland.
    12. Ignazio Angeloni, 2009. "A Tale of Two Policies- Prudential Regulation and Monetary Policy with Fragile Banks," Bruegel Working Papers 345, Bruegel.
    13. repec:bof:bofrdp:urn:nbn:fi:bof-201602101026 is not listed on IDEAS
    14. Silvo, Aino, 2016. "The interaction of monetary and macroprudential policies in economic stabilisation," Bank of Finland Research Discussion Papers 1/2016, Bank of Finland.

    More about this item

    Keywords

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    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • G3 - Financial Economics - - Corporate Finance and Governance

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