Will Cong, Steven R. Grenadier, Yunzhi Hu
Finance Theory Insights
Issue 2 (May 2022)
Investor Confidence in the Financial System
This issue of FTG Insights covers research on investor confidence---both its causes and its consequences, and including applications to currency, banking, and securitization markets.
“Dynamic Interventions and Informational Linkages” argues that in a financial crisis bailing out smaller banks could be a better way to instill confidence in the resiliency of the banking sector. “U.S. Government Bonds: Still a Safe Haven?” argues that the status of US treasuries as the world’s safe asset stems not only from strong fundamentals, but also because the sheer size of the U.S outstanding debt affords a liquid vehicle for international savers to coordinate on. “Securitization, Ratings, and Credit Supply” shows that in the presence of securitization reliance on credit ratings to rate the quality of banks’ loan portfolios can actually reduce banks’ lending standards. “Financial Markets, the Real Economy, and Self-Fulfilling Uncertainties” highlights that information production in financial markets and the real economy is both affected by, and affects, the level of aggregate economic activity, amplifying and accelerating macroeconomic business cycle fluctuations.
Some financial institutions may be “too big to save first.” Saving smaller ones more easily builds confidence in the resiliency of the system that ultimately decreases overall bailout costs.
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Brendan Daley, Brett Green, Victoria Vanasco
Securitization, Ratings, and Credit Supply
By facilitating securitization, credit ratings may induce banks to issue worse loans.
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Zhiguo He, Arvind Krishnamurthy, Konstantin Milbradt
U.S. Government Bonds: Still a Safe Haven?
U.S. government bonds are safe assets in part because investors have coordinated on them, but that can change in the future.
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Jess Benhabib, Xuewen Liu, Pengfei Wang
Financial Markets, the Real Economy, and Self-Fulfilling Uncertainties
Information production in financial markets and the real economy is both affected by, and affects, the level of aggregate economic activity, amplifying the macroeconomic business cycle fluctuations.
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