Summary: Artikelen Fmi

Read the summary and the most important questions on Artikelen FMI

• 1 Gabrieli and Georg: A Network View on Money Market Freezes

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• Gabrieli and Georg mention four reasons why (interbank) money markets are important:

  1. Major source of liquidity for banks (25% balance sheet banks euro area)
  2. Smooth and cost-efficient allocation of liquidity is key for financial stability --> illiquidity can trigger fire sales
  3. Money markets are first intermediary market between the central bank and financial markets --> essential for implementation monetary policy stance
  4. Risk premie can be a sign of misplacing of risk due to asymmetric information --> breakdown of pricing and market discipline. 

• According to Gabrieli and Georg was there a money market freeze in Europe during the 2007/2008 crisis?

  • The price at which Euro Area banks lent to each other soared, particularly in term segments
    

• Eplain the three perspectives from which Gabrieli and Georg research the money market in Europe:

  1. The Aggregate perspective (Was there a market freeze in the euroarea interbank market? How prevalent were counterpart risk concerns around the Lehman Insolvency, what there liquidity hoarding?)
  2. The Structural perspective (Was there a structural change in the interbank network structure around the Lehman insolvency?
  3. The Network view. Does the position of a bank in the interbank network matter for access to liquidity? Interbank networks 

• What were the main results of the structural perspective? (Gabrieli and Georg)

  
  Betweenness measures a banks access to (interbank) liquidity. 
  

  1. The euroarea interbank network has a European core connecting national core-periphery networks. 
  2. Network structure is surprisingly robust to the shock
  3. Change in Network structure can be described as "network shrinking"

• What were the main results of the network view (Gabrieli Georg)

  
  

  • A banks position in the interbank market is a significant variable to explain banks' access to liquidity. A large inter banking channel and the number of counter parties (betweenness) increases the amount of borrowing (liquidity provided).
    
  • Strategically better network position also translates into higher intermediation spreads (spread between deposits and lending)
    

• What is the Target2 system? Why do Gabrieli and Georg use it?

  TARGET2 is an interbank payment system for the real-time processing of cross-border transfers throughout the European Union.(Settles 90% of all transactions between all European banks. The inter bank market is an OTC market, the only data available is that of Target2. They Used both the overnight and term segments.

• 2 Liquidity stress testing Survey

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• What is the network effect? How can a gridlock occur by this effect?

  
  The fact that most financial institutions are simultaneously engaged in lending and borrowing can give rise to a Network effect. In a setting that involves multiple parties, a gridlock can occur when concerns about counterparty credit risk result in failure to cancel out offsetting positions. Each party then has to hold additional funds to protect itself against the risks that are not netted out, reducing liquidity in the market. These mechanisms may explain the ‘gridlock’ observed in the interbank lending market during the recent subprime crisis, when banks were unwilling to lend to each other and instead hoarded their reserves.

• 3 De Haas Lelyveld (2010) Internal capital Markets and Lending by Multinational Bank subsidiaries

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• Answer the two main questions of de haas and Lelyveld (2010) paper on internal capital markets and lendingIs there evidence that global banks operate internal capital markets across national borders?If so, what are the consequences for host and home countries?

  1. YEs there is evidence that global banks operate internal capital markets across national borders. (Effect for both support and substation, but primality for the former).

  
  
  Suport effect:
  - strong parent bank (+)
  - high net interest margin sub (+)
  - low loan loss provisions (+)
  - less parent bank liquidity (+)
  - subs in the same group profitabel (+)
  - during crisis multinational bank subs keep lending, domestic not
  
  Substitution effect
  - economic growth home country (-)
  - host country economic growth (+)

• Conclusions for pre-crisis period

  1. Parent banks trade off lending across countries (substitution effect)
  2. Subsidiaries of stronger parent banks grow faster (support effect)
  3. Foreign bank subsidiaries do not rein in lending during a local crisis, while domestic banks have to do so (support effect)

  
  
  

  • Global banks appear to operate internal capital markets across country borders
  • Bank ownership structure matters: foreign banks expose countries to foreign shocks but insulate them form local shocks

• what are the policy implications of the findings of De Haas Lelyveld (2010)

  Implications:
  

  • Openness to multinational bank subsidiaries can benefit host countries (the aggregate credit supply in the host country becomes more stable and less strongly correlated with the local business cycle)
  • For countries that plan to open up the banking system, make sense to permit cross-boarder foreign bank lending, and allow committed multinational banks to establish or buy local subs.
  • Countries should encourage a variety of host countries