Conference Agenda

Please note that all times are shown in the time zone of the conference. The current conference time is: 1st Nov 2024, 12:56:18am CET

 
 
Session Overview
Session
FI 03: Banking, Central Banking, and Financial Stability
Time:
Thursday, 17/Aug/2023:
10:30am - 12:00pm

Session Chair: Xuan Wang, Vrije Universiteit Amsterdam
Location: 2A-00 (floor 2)


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Presentations
ID: 400

The Limits of Fiat Money: Lessons from the Bank of Amsterdam

Wilko Bolt1,2, Jon Frost3, Hyun Song Shin3, Peter Wierts1,2

1Vrije Universiteit (VU) Amsterdam; 2De Nederlandsche Bank (DNB); 3Bank for International Settlement (BIS)

Discussant: Toni Ahnert (European Central Bank)

Central banks can operate with negative equity, and many have done so in history without undermining trust in fiat money. However, there are limits. How negative can central bank equity be before fiat money loses credibility? We address this question using a global games approach motivated by the fall of the Bank of Amsterdam (1609–1820). We solve for the unique break point where negative equity and asset illiquidity renders fiat money worthless. We draw lessons on the role of fiscal support and central bank capital in sustaining trust in fiat money.

EFA2023_400_FI 03_1_The Limits of Fiat Money.pdf


ID: 868

Whatever It Takes? Market Maker of Last Resort and its Fragility

Dong Beom Choi1, Tanju Yorulmazer2

1Seoul National University, Korea; 2Koc University, Turkiye

Discussant: Xuan Wang (Vrije Universiteit Amsterdam)

We provide a theoretical framework to analyze the market maker of last resort (MMLR) role of central banks. Central bank announcement to purchase assets in case of distress promotes private agents’ willingness to make markets, which immediately restores liquidity to prevent disorderly sales. This, in turn, decreases the future need for the central bank to intervene. Here, the central bank can reduce the expected usage of the facility by announcing a large capacity, that is, it can end up buying less ex-post by committing to do more ex-ante. However, this beneficial feature comes with potential downsides. First, the central bank may not achieve the intended outcome due to the possibility of multiple self-fulfilling equilibria, which may arise if it does not intervene with sufficient aggression or if market participants have doubts about its commitment. Second, public liquidity provision may crowd out private liquidity if the MMLR access becomes permanent and make the intervention ineffective.

EFA2023_868_FI 03_2_Whatever It Takes Market Maker of Last Resort and its Fragility.pdf


ID: 1669

Bank Equity Risk

Jens Dick-Nielsen, Zhuolu Gao, David Lando

Copenhagen Business School, Denmark

Discussant: Maximilian Jager (Frankfurt School of Finance & Management gGmbH)

Financial regulation has led banks to increase their equity ratios. Yet, several studies find that this has not led to a decrease in bank equity risk. We show theoretically, that keeping less capital in excess of the minimum capital requirement can outweigh the risk-reducing effect on equity of increased total capitalization. Empirically, we find that excess capitalization is a significant determinant of equity risk, and can explain why bank equity risk has not become lower after the Great Financial Crisis. Smaller excess capitalization also leads to decreases in market-to-book ratios. Lower leverage has, however, reduced the cost of bank debt.

EFA2023_1669_FI 03_3_Bank Equity Risk.pdf


 
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