Finance Seminar（2018-06）

Topic: Shadow Banking and Systemic Bailout Exposure

Speaker: Yizhi Xu, University of California, Los Angeles

Time: Wednesday, 7 February, 10:00-11:30

Location: Room 217, Guanghua Building 2

Abstract:

We study the impact of systemic bailout expectations on bank credit growth patterns. Using daily put options data of U.S. bank holding companies, we measure each bank holding company’s exposure to the systemic bailout factor, which is the sensitivity of each bank’s out-of-the-money put option price to the variations of sector-wide put option basket-index spreads. We show that low market expectations of the banking sector systemic bailouts played a significant role in the weak bank credit recovery after the subprime crisis. Bank holding companies with higher pre-crisis exposure to the systemic bailout factor experienced larger post-crisis deviations from the pre-crisis bank credit growth trend. Perhaps surprisingly, such pattern is persistent even for banks that are less affected by the post-crisis financial regulations and less exposed to borrowers from the deteriorating sectors. Furthermore, we drill down to the commercial bank subsidiary level data while controlling for parent bank holding company fixed effects. This analysis reveals that commercial bank subsidiaries within the same bank holding company present same credit growth patterns even though they have different exposure to financial regulations and deteriorating sectors. To rationalize the empirical findings, we propose a model with both commercial banks and shadow banks. The securitization market, which connects the two types of banks, determines how market expectations of systemic bailouts to shadow banks affect the credit origination capacity of the whole banking system.

Introduction:

Yizhi Xu is a Ph.D. candidate in University of California, Los Angeles. His primary research fields are Macroeconomics, Financial Institutions, and International Finance.

His secondary research fields are Financial Economics and Fiscal Policy. He holds B.S. in Mathematics, Statistics, and Economics with Honors (Highest Distinction) from Purdue University. He holds a C.Phil (M.S. equivalent) in Economics from University of California.

Your participation is warmly welcomed!