金融危机理论经典Presentation of Optimal Financial Crises_孙建飞

金融危机理论经典Optimal Financial Crises

Optimal Financial Crises-Allen and Gale (1998), JF SUN Jianfei , 1143809003 (SAIF, Shanghai Jiao Tong University)

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金融危机理论经典Optimal Financial Crises

About the writers Franklin Allen– Franklin Allen is the Nippon Life Professor of Finance and Professor of Economics at the Wharton School of the University of Pennsylvania. He has been on the faculty since 1980. He is now Director of the Wharton Financial Institutions Center. – His main areas of interest are corporate finance, asset pricing, financial innovation, comparative financial systems, and financial crises.

Douglas Gale– Douglas Gale is the Professor of Economics, New York University. – His main areas of interest are financial economics, microstructure of markets, foundations of macroeconomics and monetary economics.

A series of publications on Financial Crises written by them in the past 10 years:– Papers-Allen and Gale 1994,1998, 2000a, 2000b, 2004, 2005; Gale, 2003, 2004. – Book-Understanding Financial Crisis by Allen and Gale, Oxford University Press

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金融危机理论经典Optimal Financial Crises

The paper outline Introduction Ⅰ. Optimal Risk-Sharing and Bank Runs Ⅱ. Costly Financial Crises Ⅲ. Asset Trading and the Efficiency of Runs Ⅳ. Summary

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金融危机理论经典Optimal Financial Crises

Introduction Motivations– The historical importance of financial crisis or panics and their current relevance in emerging countries – It is important to understand why panics occur and what policies central banks should implement to deal with them. – There is a large literature on bank runs, but there is relatively little on the optimal policy that should be followed to prevent or “manage” runs. – They argue that there are costs and benefits to having bank runs.

The previous related literature:– Sunspot View-Model crises as random events: Kindleberger (1978), Diamond and Dybvig (1983) – Business-cycle View-Model crises as a natural outgrowth of the business cycle: Wallace (1988, 1990), Chari (1989), Champ, Smith, and Williamson (1996), Chari and Jagannathan (1988), Jacklin and Bhattacharya (1988), Hellwig (1994), Alonso (1996) – Gorton (1988), Calomiris and Gorton (1991) conducted an empirical study to differentiate between the "sunspot" view and the business-cycle view of banking panics. And they conclude that the data do not support the "sunspot“ view that banking panics are random events.

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金融危机理论经典Optimal Financial Crises

Basic Framework Inherit D-D Model– – – – – A model to show how cyclical fluctuations in asset values can produce bank runs. The basic framework is the standard one from Diamond and Dybvig (1983). Banks have comparative advantage in investing in an illiquid, long-term, risky asset. At 1st date, individuals deposit their funds in the bank. The time at which they wish to withdraw is determined by their consumption needs. Early consumers withdraw at 2nd date and late consumers withdraw at 3rd date. The banking sector is perfectly competitive, so banks offer risk-sharing contracts that

maximize depositors' ex ante expected utility, subject to a 0-profit constraint.

Two main differences with D-D model:– (1) Assumption that illiquid, long-term assets held by banks are risky and perfectly correlated across banks. In A-G model asset returns are random and information about future returns becomes available before the returns are realized. When information is bad it has power to precipitate a crisis. (2) A-G do not make the first-come, first-served assumption. This assumption has been the subject of some debate in the literature as it is not an optimal arrangement in the basic D-D Model. In a number of countries and historical time periods banks have had right to delay payment for some time period on certain types of accounts. A-G model this type of situation by assuming available liquidity is split on an equal basis among those withdrawing early. In the context this arrangement is optimal. A-G alsoassume that those who do not withdraw early have to wait some time before they can obtain their funds and again what is available is split among them on an equal basis.

–

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金融危机理论经典Optimal Financial Crises

Ⅰ. Optimal Risk-Sharing and Bank Runs (A) The optimal risk-sharing problem:

Where R is the return to the risky asset ; E denotes consumers' total endowment of consumption good at date 0 (the amount deposited) ; X and L denote the representative bank's holding of the risky and safe assets, respectively; RX denotes amount of the safe asset left over after early consumers are paid; c(R) denotes deposit contracts, which give consumption of early and late consumers conditional on the return to the risky asset.

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金融危机理论经典Optimal Financial Crises

The optimal contract:

Ⅰ. Optimal Risk-Sharing and Bank Runs (A)

The optimal risk sharing allocation and the optimal deposit contract with runs. Theorem 1: The solution to the optimal risk-sharing problem P1 is uniquely characterized by the following conditions:

And The optimal portfolio must satisfy L>0 and X>0. The allocation is first-best efficient.2016/1/9 7

金融危机理论经典Optimal Financial Crises

Ⅰ. Optimal Risk-Sharing and Bank Runs (B)

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金融危机理论经典Optimal Financial Crises

Ⅰ. Optimal Risk-Sharing and Bank Runs (B)

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金融危机理论经典Optimal Financial Crises

Ⅰ. Optimal Risk-Sharing and Bank Runs (C)

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金融危机理论经典Optimal Financial Crises

Ⅰ. Optimal Risk-Sharing and Bank Runs (D)

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金融危机理论经典Optimal Financial Crises

Optimal risk sharing with costly liquidation:

Ⅱ. Costly Financial Crises (A)

Let r>1denote the return on the safe asset between dates 1 and 2. A-G continue to assume that return on safe asset between dates 0 and1 is one. This assumption is immaterial since all of safe asset is held by bank at date 0. The optimal risk sharing allocation with costly liquidation:

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金融危机理论经典Optimal Financial Crises

Ⅱ. Costly Financial Crises (B)

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金融危机理论经典Optimal Financial Crises

Ⅱ. Costly Financial Crises (B、C)

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金融危机理论经典Optimal Financial Crises

Ⅱ. Costly Financial Crises (D)

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金融危机理论经典Optimal Financial Crises

Ⅲ. Asset Trading and the Efficiency of Runs Key assumption in this section: a competitive asset market in which the risky asset can be traded. The optimal deposit contract i

n this situation:

The effect of making the situation worse: (1) Because a bank run exhausts the bank's assets at date 1, a late consumer who waits until date 2 to withdraw will be left with nothing, so whenever there is a bank run, it will involve all the late consumers and not just some of them. (2) If the market for the risky asset is illiquid, the sale of the representative bank's holding of the risky asset will drive down the price, thus making it harder to meet the depositors' demands.

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金融危机理论经典Optimal Financial Crises

Summary Academic margin contribution– Verify that banking panics are not "sunspot“ phenomena but rather the result of the business cycle. – When depositors observe leading economic indicators and perceive that a bank's receipts are going to be low, there is a run. This paper develops a simple model of this phenomenon and uses it to identify the optimal policy toward runs.

Conclusions:– Financial crises can be optimal if return to the safe asset is the same inside and outside banking system. In this case, central-bank and other government policies that eliminate runs lower the welfare of depositors. – If return to safe asset is higher within banking system than outside, so that bank runs are costly, runs alone cannot achieve optimal allocation of risk. A monetary intervention by the central bank can allow the first-best to be achieved. – If risky asset can be sold in an asset market, bank runs may be costly. Runs force banks to liquidate their assets when prospects are bad. Simultaneous liquidation drives asset prices down and allows speculators in the asset market to profit. Central bank intervention that prevents the collapse in prices in the asset market can allow a Pareto improvement.

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金融危机理论经典Optimal Financial Crises

Thank you!

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