A Wake-Up Call: Information Contagion and Strategic Uncertainty

China - Commune, Housewives assembling electrical componentsColorVolume 60, Page 1

Loan insurance, market liquidity, and lending standards

We examine loan insurance when lenders can screen at origination, learn loan quality over time, and can sell loans in secondary markets. Loan insurance reduces lending standards but improves market liquidity. Lenders with worse screening ability insure, which commits them to not exploiting future private information about loan quality and improves the quality of uninsured loans traded. This externality implies insufficient insurance. A regulator achieves constrained efficiency by (i) guaranteeing a minimum price of uninsured loans to eliminate a welfare-dominated illiquid equilibrium; and (ii) subsidizing loan insurance in the liquid equilibrium. Our results can inform the design of government-sponsored mortgage guarantees

Asset encumbrance, bank funding and fragility

We model asset encumbrance by banks subject to rollover risk and study the consequences for fragility, funding costs, and prudential regulation. A bank's privately optimal encumbrance choice balances the benefit of expanding profitable yet illiquid investment, funded by cheap long-term senior secured debt, against the cost of greater fragility from runs on unsecured debt. We derive testable implications about encumbrance ratios. The introduction of deposit insurance or wholesale funding guarantees induces excessive encumbrance and fragility. Ex-ante limits on asset encumbrance or ex-post Pigovian taxes eliminate such risk-shifting incentives. Our results shed light on prudential policies currently pursued in several jurisdictions

Krueppel-Like Factor 4 Expression in Phagocytes Regulates Early Inflammatory Response and Disease Severity in Pneumococcal Pneumonia

The transcription factor Krueppel-like factor (KLF) 4 fosters the pro-inflammatory immune response in macrophages and polymorphonuclear neutrophils (PMNs) when stimulated with Streptococcus pneumoniae, the main causative pathogen of community-acquired pneumonia (CAP). Here, we investigated the impact of KLF4 expression in myeloid cells such as macrophages and PMNs on inflammatory response and disease severity in a pneumococcal pneumonia mouse model and in patients admitted to hospital with CAP. We found that mice with a myeloid-specific knockout of KLF4 mount an insufficient early immune response with reduced levels of pro-inflammatory cytokines and increased levels of the anti-inflammatory cytokine interleukin (IL) 10 in bronchoalveolar lavage fluid and plasma and an impaired bacterial clearance from the lungs 24 hours after infection with S. pneumoniae. This results in higher rates of bacteremia, increased lung tissue damage, more severe symptoms of infection and reduced survival. Higher KLF4 gene expression levels in the peripheral blood of patients with CAP at hospital admission correlate with a favourable clinical presentation (lower sequential organ failure assessment (SOFA) score), lower serum levels of IL-10 at admission, shorter hospital stay and lower mortality or requirement of intensive care unit treatment within 28 days after admission. Thus, KLF4 in myeloid cells such as macrophages and PMNs is an important regulator of the early proinflammatory immune response and, therefore, a potentially interesting target for therapeutic interventions in pneumococcal pneumonia

Rollover risk, liquidity, and macro-prudential regulation

In 2014 all ECB publications feature a motif taken from the €20 banknote. NOTE: This Working Paper should not be reported as representing the views of the European Central Bank (ECB). The views expressed are those of the authors and do not necessarily reflect those of the ECB. Lamfalussy Fellowships This paper has been produced under the ECB Lamfalussy Fellowship programme. This programme was launched in 2003 in the context of the ECB-CFS Research Network on “Capital Markets and Financial Integration in Europe”. It aims at stimulating high-quality research on the structure, integration and performance of the European financial system. The Fellowship programme is named after Baron Alexandre Lamfalussy, the first President of the European Monetary Institute. Mr Lamfalussy is one of the leading central bankers of his time and one of the main supporters of a single capital market within the European Union. Each year the programme sponsors five young scholars conducting a research project in the priority areas of the Network. The Lamfalussy Fellows and their projects are chosen by a selection committee composed of Eurosystem experts and academic scholars. Further information about the Network can be found a