In their model, the authors imagine a world where investing is fraught with moral hazard. The picture of small depositors lining up around the block to withdraw funds has received much attention. Because of asymmetric information firms may get no funding because they do not have enough pledgeable income fraction of their return that can be committed to be paid to outsiders. Calomiris and richard herring though the regulatory landscape postcrisis remains far from fixed, contingent capital, or cocos, appear likely to form part of policymakers toolkits. Calomiris and kahn 1991, calomiris, heider and hoerova 20. Charles calomiris columbia business school directory. What caused chicago bank failures in the great depression. The recent crisis also provided further empirical evidence of the intolerance of money market investors see for, example, covitz. We show that a system of large, welldiversified, banks is more efficient than a. Demandabledebt finance by banks warrants explanation. Although these models provide both a concise formalization of the fact that banks provide consumption flexibility and a coher ent account of bank runs, they are unable to.
The rst inventory management problem was proposed by f. The latter article conjectures that a combination of outside equity, inside equity and outside debt works similarly in environments where corporate governance of outside equity holders. In these models, depositor beliefs regarding the solvency of a bank play an important role in determining depositor actions. We discuss some of these papers in more detail below. Pdf the role of demandable debt in structuring optimal bank. Calomiris and kahn, 1991 deposits avoid holdup problem by banker diamond and rajan, 2001 debt can be traded gorton and pennacchi, 1990 citibank had regulatory capital ratio of 11% when bailed out, dexia had 12% on july 15, 2011, bailout on 10th october. Calomiris, with 481 highly influential citations and 205 scientific research papers. A recent hypothesis put forward by calomiris, kahn, and longhofer 1994 suggests that continued discrimination against minorities in credit market situations could result from the lack of cultural affinity between white loan officers and minority applicants. However there are also other theories which argue that higher capital regulations may actually reduce bank stability. Here we explain this basic idea using the calomiriskahn 1991 model.
Whats wrong with prudential b ank regulation and how to. An explanation is developed in which demandable debt provides incentivecompatible intermediation where the banker has comparative advantage in allocating investment. Calomiris and kahn explain the firstcomefirstserved rule. If bank debt holders are protected by deposit insurance or other guarantees, however, moral hazard can be exacerbated because bank debt holders lose their incentive to monitor and control banks risk taking bhattacharya, boot, and thakor, 1998. By holding reserves, banks insulate themselves against the 10 liquidity risk of a small number of. If bank debt holders are protected by deposit insurance or other guarantees, however, moral hazard can be exacerbated because bank debt holders lose their incentive to monitor and control banks. The discussion is organized as a set of nine specific questions, which build in logical. Introduction this paper addresses questions about prudential capital regulation that are critical to regulatory policy. These exceptions include calomiris and kahn 1991, diamond.
Introduction markus brunnermeier, lars hansen, yuliy sannikov princeton, chicago, nyu, upenn, northwerstern, epfl, stanford, chicago fed spring 2019. Does increased shareholder liability always reduce bank risk haelim anderson 1 daniel barth 2 3 dong beom choi 1federal deposit insurance corporation 2o ce of financial research, u. But, this does not generate system wide panics, but rather runs on individual banks. Corporate governance and risk management at unprotected. Financial markets, institutions and liquidity franklin allen and elena carletti 1. Kahn columbia university columbia business school and university of illinois, urbanachampaign downloads 45 429,507.
See goodhart 1988, gorton and pennacchi 1990, calomiris and kahn 1991, calomiris, himmelberg and wachtel 1995, calomiris and longhofer 2009, dang, gorton and holmstrom 2012. The cultural affinity hypothesis and mortgage lending. This cited by count includes citations to the following articles in scholar. If bank debt holders are protected by deposit insurance or other guarantees, however, moral hazard can be exacerbated because bank debt holders lose their incentive to monitor and control banks risk taking. For simplicity, assume that there are only three people, all of. There is undoubtedly widespread support from regulators the world. Calomiris and kahn 1991, depositors receive noisy and independent signals about the risky portfolio outcome of the bank. Housingfinance intervention and private incentives. The picture of small depositors lining up around the block to withdraw funds. Basu explanation of the banking crisis ultimately boils down to the contagion effect. By holding reserves, banks insulate themselves against the liquidity risk of a small number of. The role of demandable debt in structuring optimal banking. A theory of bank liquidity requirements bank of spain.
Calomiris and kahn 1991, may not be able to raise external funds at all. The recent crisis also provided further empirical evidence of the intolerance of. Columbia university columbia business school and university of illinois, urbanachampaign downloads 45. Calomiris and kahn 1991 believe that demandable deposits give depositors an option to force liquidation, which in turn gives bank management incentive to act. Demandable debt in structuring optimal banking ar rangements, mimcograph, northwestern university, 1988. Optimal contingent bank liquidation under moral hazard, working paper series, issues in financial regulation 91, federal reserve bank of chicago, revised 1991. Explain why bank runs historically targeted insolvent banks. Department of treasury 3seoul national university 19th annual fdicjfsr bank research conference september 2019 the views expressed in this presentation are those of the authors and are not necessarily. In a multiperiod setting, capital regulation is motivated by the fact that. A theory of bank liquidity requirements request pdf.
A read is counted each time someone views a publication summary such as the title, abstract, and list of authors, clicks on a figure, or views or downloads the fulltext. In the past, a study of calomiris and kahn 1991 states that bank risk decreases in the presence of effective monitoring of bank funds and sophisticated diversification of funding resources. The decline of private deposit insurance in the united. Calomiris and kahn 1991 argue that the ability of depositors to withdraw deposits on demand provides an incentive for informed depositors to monitor banks and trigger a run if the bank is likely to expropriate depositor. Pdf the role of demandable debt in structuring optimal. Explain the existence of the sequential service constraint ssc.
The role of demandable debt in structuring optimal. Banks come to the rescue creating liquidity by holding collateral and commit to make. Here we explain this basic idea using the calomiris kahn 1991 model. Demandabledebt finance by banks warrants explanation because it entails costs of bank suspension, liquidation, and idle reserve holdings. If bank debt holders are protected by deposit insurance or other guarantees, however, moral hazard can be exacerbated because bank debt holders lose their incentive to monitor and control banks risk taking calomiris, heider and hoerova 20. Calomiris is the henry kaufman professor of financial institutions at columbia business school, the director of columbia business schools program for financial studies and of the pfs initiative on finance and growth in emerging markets, and a professor at columbias school of international and public affairs. Calomiris and kahn 1991 believe that demandable deposits give depositors an option to force liquidation, which in turn gives bank management incentive to act in depositors interest. Introduction what are the defining characteristics of a bank. L this model has become widespread in management and operations. The dark side of bank wholesale funding request pdf.
Calomiris and kahn regard bank runs as always beneficial since they prevent fraud and allow the salvage of some of the banks value. Whats wrong with prudential b ank regulation and how to fix it. A theory of bank liquidity requirements columbia sipa. Reforming banks without destroying their productivity and value, journal of applied corporate finance, morgan stanley, vol. The role of demandable debt in structuring optimal banking arrangements 1991 cached. Brunnermeier, markus and martin oehmke, 20, maturity rat race, journal of finance. For simplicity, assume that there are only three people, all of them risk neutral. In a privately insured system fraud may be particularly pronounced be cause, unlike federally insured institutions, privately insured institutions can not avoid runs by depositors once their large losses, or those of their fel low members, become common knowledge. The full text of this paper is available here as an adobe acrobat pdf. Demandabledebt finance by banks warrants explanation because it entails costs of bank suspension. Demandable debt 499 effect of a contract whose whole purpose is to provide consumption flexibility. The role of demandable debt in structuring optimal banking arrangements. The role of demandable debt in structuring optimal banking arrangements 1991.
The ones marked may be different from the article in the profile. Anticipating this possibility, depositors demand a higher risk premium and constrain deposit size given bank capital. Financial modernization and banking theories san francisco fed. Theory, empirics, and policy1 shekhar aiyar, charles w. Corporate governance, rent seeking, portfolio choice, and.
Delegated monitoring theory of banking notes delegated. The efficiency of selfregulated payment systems american. Delegated monitoring theory of banking calomiris kahn a. Does increased shareholder liability always reduce bank risk. Delegated monitoring theory of banking calomiriskahn a. Diamond and rajan 2001 develop a model in which banks have special skills to ensure that.
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