VGSF - WU Vienna - LC

David Martinez Miera, University Carlos III de Madrid

Campus WU D3.0.225 11:00 - 12:30

Organizer VGSF

As part of the ser­ies of the "Fin­ance Re­search Sem­inar", VGSF wel­comes David Martinez Mi­era from the Uni­versity Car­los III de Mad­rid to present his re­search pa­per.
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Pa­per

In­terest Rates, Mar­ket Power, and Fin­an­cial Sta­bil­ity

This pa­per ana­lyzes the ef­fects of safe rates on fin­an­cial in­ter­me­di­ar­ies’ risk-­tak­ing de­cisions. We con­sider an economy where (i) in­ter­me­di­ar­ies have mar­ket power in grant­ing loans, (ii) in­ter­me­di­ar­ies mon­itor bor­row­ers which lowers their prob­ab­il­ity of de­fault, and (iii) mon­it­or­ing is not ob­serv­able which cre­ates a moral haz­ard prob­lem. We show that lower safe rates lead to lower in­ter­me­di­ation mar­gins and higher risk-­tak­ing when in­ter­me­di­ar­ies have low mar­ket power, but the res­ult re­verses for high mar­ket power. We also show that when in­ter­me­di­ar­ies have high mar­ket power com­pet­i­tion from (non­mon­it­or­ing) fin­an­cial mar­kets res­ults in a U-shaped re­la­tion­ship between policy rates and risk-­tak­ing. The pa­per ex­am­ines the ro­bust­ness of these res­ults to in­tro­du­cing het­ero­gen­eity in mon­it­or­ing costs, entry and exit of in­ter­me­di­ar­ies, and fund­ing with de­pos­its and cap­ital.



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