Contributions published at Banking (Jean-Charles Rochet)

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We introduce in a dynamic–contracting framework with moral hazard the possibility of recapitalization as an alternative to liquidation when a firm is in financial distress. This is achieved by considering a loss–averse agent and by allowing (but not requiring) the latter to inject additional capital into the firm when necessary. We show that firm recapitalization may arise in an optimal, long–term contract. As a consequence, we find that there are two mechanisms at a firm’s disposal so as to deal with financial difficulties: one corresponds to a recapitalization process, the other to a liquidation one. The choice of mechanism is based on a cost–benefit analysis.

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We study the dynamics of an innovative industry when agents learn about its strength, i.e., the likelihood that it gets hit by negative shocks. Managers can exert risk-prevention effort to mitigate the consequences of such shocks. As time goes by, if no shock occurs, confidence improves. This attracts managers to the innovative sector. But, when confidence becomes high, less managers exerting low risk-prevention effort also enter. This accelerates the growth of the industry, while inducing a decline in risk-prevention. The longer the boom, the stronger the confidence, the larger the losses if a shock occurs. While the above dynamics arise in the first best, with asymmetric information there is excessive entry of inefficient managers, earning informational rents at the expense of efficient managers. This inflates the innovative sector and increases its vulnerability.

This Bachelor thesis analyzes the differences between how Swiss and European population allocate their assets after the crisis. By comparing the respective European countries with the Swiss population, a great discrepancy is expected. For this purpose, data from the Swiss Statistics Department and from the Eurostat, as well as research papers issued by the Swiss National Bank and European Central Bank were collected. Since different resources are being compared to each other, a deeper examination of the collected data is needed. Having established a basis, the different outcomes of net wealth across countries in the euro area can be compared and reviewed.

This thesis is an empirical study of two theoretically-motivated liquidity measures, namely the Liquidity Creation Measure (LCM) proposed by Berger and Bouwman (2009) and the Liquidity Mismatch Index (LMI) proposed by Bai, Krishnamurthy and Weymuller (2015). The performances of the LCM and the LMI are not directly comparable since these liquidity measures are computed using different datasets. Berger and Bouwman (2009) compute the LCM for U.S. commercial banks, while Bai, Krishnamurthy and Weymuller (2015) compute the LMI for U.S. bank holding companies. Therefore, this thesis aims to compute both measures using the same dataset and then perform an empirical comparison of their performances. I compute the LCM and the LMI for all U.S. commercial banks during the sample period of 2003:Q1-2013:Q4 and evaluate the two measures on two dimensions: macro and micro. I show that the LMI performs better than the LCM in both dimensions as it satisfies two important characteristics of a good liquidity measure specified by Bai, Krishnamurthy and Weymuller (2015). From macro-prudential perspectives, the LMI is able to measure liquidity imbalances in the financial system and serve an early warning indicator of financial crises. From micro considerations, the LMI describes liquidity risk in the cross-section of banks and determines banks with higher liquidity risk.

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We develop a simple integration of banks into the Solow model. The objective is to provide a tractable benchmark for analyzing the long-term impact of crises on economic activities and growth. A fraction of firms have to rely on banks for financing their investments while banks face themselves an endogenous leverage constraint. Informed lending by banks and uninformed lending through capital markets spur capital accumulation. The ensuing coupled accumulation rules for household wealth and bank equity yield a uniquely determined steady state. We highlight three properties when shocks to wealth, productivity or trust affect the economy. First, typically bond and loan financing react in opposite directions to such shocks. Second, negative temporary shocks to household wealth (financial crisis) or negative sectoral production shocks can surprisingly cause persistent booms of banking and even of the entire economy -- after an initial bust. Third, shocks to bank equity (banking crisis), however, lead to large and persistent downturns associated with high output losses.

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Making use of a structural model that allows for optimal liquidity management, we study the role that repos play in a bank's financing structure. In our model the bank's assets consist of illiquid loans and liquid reserves and are financed by a combination of repos, long--term debt, deposits and equity. Repos are a cheap source of funding, but they are subject to an exogenous rollover risk. We show that their use adds to the cost of long--term debt financing, which limits the bank's appetite for unstable repo funding. This effect is, however, weakened under poor returns on assets, abundant deposit funding and the depositor preference rule. We also analyze the impact of a liquidity coverage ratio, payout restrictions and a leverage ratio on the bank's financing choices and show that all these tools are able to curb the bank's reliance on repos.

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