Finance: Research, Policy and Anecdotes

My last conference of the year (and even decade) was on Funding Stability and Financial Regulation and organised by ACPR and ANR in Paris. Yet, another financial stability workshop, I thought, but it turned out to include a number of very interesting and policy-relevant papers, some of whom I will mention in the following. I will not discuss my own paper, as I will dedicate a separate blog entry to it next year, when a presentable working paper version will be finally ready.

Helene Rey presented work on Machine Learning and the Financial Crisis. Using a general framework that draws on different crisis prediction models in a type of meta-analysis, it improves on standard crisis prediction models (which typically have a relatively poor out-of-sample prediction power) and is able to predict systemic financial crises 12 quarters ahead in quasi-real time with very high signal to noise ratio.  Melina Papoutsi shows the importance of lending relationship for borrowers that fall in distress. Using data from Greece, she shows that firms that experience an exogenous interruption in their loan officer relationship are less likely to renegotiate their loans and, if they manage to renegotiate, they are given relatively tougher loan terms, compared to firms whose loan officer relationships were not interrupted. Relating this to my own work, yet again, more evidence that personal lending relationships are far from dead. My former colleague Max Bruche presented fascinating work on leveraged loan syndication (a better description would be: junk loan syndication), making a strong case that supervisors better pay more attention to retention risk in this market segment. Neeltje van Horen presented a paper that is effectively an impact evaluation of Basel III on the repo market. Specifically, she shows that the adoption of the leverage ratio (which should have a dampening effect on low-margin business such as repo transactions) had transitory effects on the access to the repo markets by smaller clients. Thibault Libert shows that large borrowers can have an impact on aggregate lending, in work that uses credit registry data from France and builds on an expanding literature that looks at the importance of firm-specific shocks for macro-aggregates. Laura Blattner uses Portuguese credit registry data to show that increased capital requirement can have perverse consequences as affected banks respond by not only cutting lending but also by reallocating credit to distressed firms with underreported loan losses. Finally, Eva Schliephake presented some very interesting theory work on how informed and uninformed depositors interact in bank runs, showing that more information can actually result in a higher likelihood of panic runs.

Overview