Banks, shadow banking, and fragility

This paper studies a banking model of maturity transformation in which regulatory arbitrage induces the coexistence of regulated commercial banks and unregulated shadow banks. We derive three main results: First, the relative size of the shadow banking sector determines the stability of the financial system. If the shadow banking sector is small relative to the capacity of secondary markets for shadow banks' assets, shadow banking is stable. In turn, if the sector grows too large, it becomes fragile: an additional equilibrium emerges that is characterized by a panic-based run in the shadow banking sector. Second, if regulated commercial banks themselves operate shadow banks, a larger shadow banking sector is sustainable. However, once the threat of a crisis reappears, a crisis in the shadow banking sector spreads to the commercial banking sector. Third, in the presence of regulatory arbitrage, a safety net for banks may fail to prevent a banking crisis. Moreover, the safety net may be tested and may eventually become costly for the regulator

Banks, Shadow Banking, and Fragility

We study a banking model in which regulatory arbitrage induces the existence of shadow banking next to regulated banks. We show that the size of the shadow banking sector determines its stability. Panic-based runs become possible only if this sector is large. Moreover, if regulated banks conduct shadow banking, a relatively larger shadow banking sector is sustainable. However, crises become contagious and spread to the regulated banking sector. We argue that deposit insurance may fail to eliminate adverse run equilibria in the presence of regulatory arbitrage. It may become tested in equilibrium if regulated banking and shadow banking are intertwined

Essays on Financial Stability

This thesis examines self-fulfilling liquidity crises that are associated with maturity and liquidity transformation conducted by financial intermediaries such as banks. It consists of three chapters. In the first chapter, we argue that the government can eliminate financial fragility by issuing government debt, which is then used to manage liquidity needs. We argue that government debt is particularly suited to manage liquidity needs as it is less likely to be subject to self-fulfilling runs than private debt. In the second chapter, we show that if a single government's fiscal power is limited, government debt may become subject to runs. In this case, supranational agreements can help to mitigate this limitation and resolve contagious and self-fulfilling sovereign debt and banking crises. In the third chapter, we argue that financial fragility may arise when agents circumvent regulatory requirements and conduct shadow banking. In particular, we argue that self-fulfilling panics in the shadow banking sector can be contagious and affect other parts of the financial system via pecuniary channels

Pandemics Depress the Economy, Public Health Interventions Do Not: Evidence from the 1918 Flu

We study the impact of non-pharmaceutical interventions (NPIs) on mortality and economic activity across U.S. cities during the 1918 Flu Pandemic. The combination of fast and stringent NPIs reduced peak mortality by 50% and cumulative excess mortality by 24% to 34%. However, while the pandemic itself was associated with short-run economic disruptions, we find that these disruptions were similar across cities with strict and lenient NPIs. NPIs also did not worsen medium-run economic outcomes. Our findings indicate that NPIs can reduce disease transmission without further depressing economic activity, a finding also reflected in discussions in contemporary newspapers

Dynamic Causal Modeling of Preclinical Autosomal-Dominant Alzheimer’s Disease

Dynamic causal modeling (DCM) is a framework for making inferences about changes in brain connectivity using neuroimaging data. We fitted DCMs to high-density EEG data from subjects performing a semantic picture matching task. The subjects are carriers of the PSEN1 mutation, which leads to early onset Alzheimer’s disease, but at the time of EEG acquisition in 1999, these subjects were cognitively unimpaired. We asked 1) what is the optimal model architecture for explaining the event-related potentials in this population, 2) which connections are different between this Presymptomatic Carrier (PreC) group and a Non-Carrier (NonC) group performing the same task, and 3) which network connections are predictive of subsequent Mini-Mental State Exam (MMSE) trajectories. We found 1) a model with hierarchical rather than lateral connections between hemispheres to be optimal, 2) that a pathway from right inferotemporal cortex (IT) to left medial temporal lobe (MTL) was preferentially activated by incongruent items for subjects in the PreC group but not the NonC group, and 3) that increased effective connectivity among left MTL, right IT, and right MTL was predictive of subsequent MMSE scores

The Debt-Inflation Channel of the German (Hyper-)Inflation

This paper studies how a large increase in the price level is transmitted to the real economy through firm balance sheets. Using newly digitized macro- and micro-level data from the German inflation of 1919-1923, we show that inflation led to a large reduction in real debt burdens and bankruptcies. Firms with higher nominal liabilities at the onset of inflation experienced a larger decline in interest expenses, a relative increase in their equity values, and higher employment during the inflation. The results are consistent with real effects of a debt-inflation channel that operates even when prices and wages are flexible

Oscillatory activity in prefrontal and posterior regions during implicit letter-location binding.

Many cognitive abilities involve the integration of information from different modalities, a process referred to as “binding.” It remains less clear, however, whether the creation of bound representations occurs in an involuntary manner, and whether the links between the constituent features of an object are symmetrical. We used magnetoencephalography to investigate whether oscillatory brain activity related to binding processes would be observed in conditions in which participants maintain one feature only (involuntary binding); and whether this activity varies as a function of the feature attended to by participants (binding asymmetry). Participants performed two probe recognition tasks that were identical in terms of their perceptual characteristics and only differed with respect to the instructions given (to memorize either consonants or locations). MEG data were reconstructed using a current source distribution estimation in the classical frequency bands. We observed implicit verbal–spatial binding only when participants successfully maintained the identity of consonants, which was associated with a selective increase in oscillatory activity over prefrontal regions in all frequency bands during the first half of the retention period and accompanied by increased activity in posterior brain regions. The increase in oscillatory activity in prefrontal areas was only observed during the verbal task, which suggests that this activity might be signaling neural processes specifically involved in cross-code binding. Current results are in agreement with proposals suggesting that the prefrontal cortex function as a “pointer” which indexes the features that belong together within an object

Visual mismatch negativity (vMMN): A review and meta-analysis of studies in psychiatric and neurological disorders

The visual mismatch negativity (vMMN) response is an event-related potential (ERP) component, which is automatically elicited by events that violate predictions based on prior events. VMMN experiments use visual stimulus repetition to induce predictions, and vMMN is obtained by subtracting the response to rare unpredicted stimuli from those to frequent stimuli. One increasingly popular interpretation of the mismatch response postulates that vMMN, similar to its auditory counterpart (aMMN), represents a prediction error response generated by cortical mechanisms forming probabilistic representations of sensory signals. Here we discuss the physiological and theoretical basis of vMMN and review thirty-three studies from the emerging field of its clinical applications, presenting a meta-analysis of findings in schizophrenia, mood disorders, substance abuse, neurodegenerative disorders, developmental disorders, deafness, panic disorder and hypertension. Furthermore, we include reports on aging and maturation as they bear upon many clinically relevant conditions. Surveying the literature we found that vMMN is altered in several clinical populations which is in line with aMMN findings. An important potential advantage of vMMN however is that it allows the investigation of deficits in predictive processing in cognitive domains which rely primarily on visual information; a principal sensory modality and thus of vital importance in environmental information processing and response, and a modality which arguably may be more sensitive to some pathological changes. However, due to the relative infancy of research in vMMN compared to aMMN in clinical populations its potential for clinical application is not yet fully appreciated. The aim of this review and meta-analysis therefore is to present, in a detailed systematic manner, the findings from clinically-based vMMN studies, to discuss their potential impact and application, to raise awareness of this measure and to improve our understanding of disease upon fundamental aspects of visual information processing