Monetary Policy Committees, Universal Banks, and Public Recapitalisations
Title: Monetary Policy Committees, Universal Banks, and Public Recapitalisations
Author: MARIATHASAN, Mike
Series/Report no.: EUI PhD theses; Department of Economics
The three papers in this thesis differ considerably with respect to methodology and topic; yet, they all reflect my overarching interest in the design of economic policies and the institutions that execute them. They are, also, testimony of the privilege to write a PhD thesis in Economics during times that leave little doubt about the relevance of thoughtful economic policy. My first, humble, contribution to designing these are the three papers in this thesis. As an introduction, I will proceed to briefly describe their contributions. In the first paper, I address the question of how diverse opinions (“beliefs”) among members of a monetary policy committee [MPC], as well as its institutional features, in particular, its size and its decision-making process, influence macroeconomic volatility. I answer this question in two parts: first, I explain the relationship between decision-making in committees and robust, or regret-minimising, decision-making. I show that the two can be equivalent under very specific conditions (on beliefs and the potential models of the economy). These conditions are hard to test empirically; therefore, I proceed, in the second part, to simulate an empirically motivated example, and, to compare the volatility generated by a, hypothetical, robust decision-maker, with actual volatility generated by the committee of the Bank of England [BoE], and, by several, differently specified, committees. I find, that under reasonable parameterisations, committee decision-making resembles robust decision-making. In addition, it turns out that greater diversity and aspiration towards consensus make monetary policy “more robust”. At the time of writing, disagreements among MPC members were often reduced only to increment changes of the interest rate. Nowadays, however, disagreements concern, for example, acceptable debt levels and are much deeper and more fiercely debated. The framework, then, suggests, for example, that the departure of conservative central bankers from the governing council of the European Central Bank [ECB] reduces the robustness of its decisions, and that robust Federal Open Market Committee [FOMC] policies (see Ellison & Sargent, 2009) may be an artefact of institutional structures, and not, as the authors suspect, of policymakers’ mindsets. In the second chapter, I turn to the issue of bank regulation, and, in particular, to the question of how the integration of commercial lending, and, investment banking, influences underwriting quality. Contributing to an old, but re-animated debate, I introduce mergers & acquisition [M&A] as a source of investment banking revenues in a benchmark model of universal banks (Kanatas & Qi, 2003). The analysis illustrates, that, when assessing the effects of financial services integration, a distinction has to be made between the effects of administrative synergies, such as the joint use of computers or staff, and informational synergies. The latter, should also be treated differently, depending on whether they constitute strategic informational gains, e.g. from underwriting, or non-strategic gains, for example, from standardised credit applications. It turns out that, ceteris paribus, and, under perfect competition, strategic efficiency gains improve incentives for higher underwriting quality, while non-strategic gains (administrative and informational) induce banks to depreciate the quality of their provided services. In the paper, I then provide conditions for the many intermediate cases. I also show that higher monopolistic rents lead to better underwriting quality, and, that deregulation can create risks for aggregate economic activity. The model provides possible explanations for why universal banking in Germany is often considered a success, while it is often treated with scepticism in the United States [US] (the German market is less competitive); and as to why studies in the US typically find improved underwriting quality after financial integration, whilst cross-country studies and studies, for example, from Taiwan uncover evidence of reduced underwriting quality (opportunities for non-strategic efficiency gains are often higher in less developed countries, whilst technical opportunities for the strategic use of information across business sections is likely to be higher in the US). In terms of theoretical contributions, the paper reconciles the predictions of Kanatas & Qi (2003) with another prominent model (Puri, 1999), and augments the latter with the insight, that the positive effect of informational spillovers does not necessarily have to rely on previous interactions between firms and banks, but can, as well, result from anticipated benefits in M&A. The third, and last, chapter is an empirical investigation into the effect the public recapitalisations during 2008-10 had upon bank lending. The chapter is joint work with Ouarda Merrouche (European Securities and Markets Agency [ESMA], initially at The World Bank). We collect information on direct public recapitalisations from public sources (homepages of central banks, ministries, etc.) and estimate their effect on changes in credit growth, using difference-in-difference and propensity score matching models. Furthermore, we analyse the determinants of these “bailouts”, as well as, of their size and their risk-absorbing properties. We identify, a shortage of liquid assets, of Tier1 capital, but also bank size as most important predictors of public bailouts, and, thus, lend support to the current regulatory debate, that is, mostly, concerned with minimum capital requirements, maturity transformation and institutions that are considered “too big too fail”. In terms of effective recapitalisations, our results lead us to emphasise decisive interventions, i.e. interventions that cover at least 49.22% of banks’ pre-crisis equity levels, and, those, that exhibit the commitment to disburden banks of their risks (recapitalisations with common equity). Furthermore, we identify positive externalities on the interbank market, and, reject the hypothesis that locally operating banks increase lending more than globally active banks that are provided with the same amount of public capital.
Defence date: 16 November 2011; Examining board: Arpad Abraham, EUI Thomas Cooley, New York University, Stern Business School Xavier Freixas, Universitat Pompeu Fabra Ramon Marimon, Supervisor, EUI
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