What’s Different about Bank Holding Companies?

By Ralph Chami, Thomas F. Cosimano, Jun Ma, Celine Rochon

February 10, 2017

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Ralph Chami, Thomas F. Cosimano, Jun Ma, and Celine Rochon. What’s Different about Bank Holding Companies?, (USA: International Monetary Fund, 2017) accessed October 6, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

The recent fnancial crisis highlighted the role of Bank Holding Companies (BHCs) in exacerbating the crisis and in transmitting monetary policy beyond the local economy to global markets. Yet, little is known about their behavior, as most models of banking typically focus on banks with a loan desk. We develop a dynamic model of a BHC that encompasses both a trading desk and a loan desk, and explore the role of risk attitude and overleveraging by the trading desk. We trace the impact of monetary policy and market innovations on bank behavior in the presence of Basel III type regulations. To our knowledge, this is a first such exercise. We show that the value of the BHC is enhanced by operating both desks, even if they both are subject to common market shocks. We explore alternative regulatory remedies to ongoing efforts to ring-fence the proprietary trading business, and show that regulations that target bank governance can mitigate possible rogue trading and the overleveraging problem.

Subject: Bank credit, Banking, Financial institutions, Financial regulation and supervision, Financial services, Loans, Market risk, Money, Securities, Yield curve

Keywords: Bank Capital, Bank COO, Bank credit, Bank distress, Bank Holding Company, Bank issues equity, Bank management, Bank regulator, Banking, Basel III, Capital constraint, Embedded option, Financial Markets, Financial Stability, Global, Loan desk, Loans, Macro Prudential, Market risk, Monetary Policy, Option payoff, Ring-Fencing, Securities, Strike price, Term Structure, Trading operations, WP, Yield curve

Publication Details

Pages:

58
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2017/026
Stock No:

WPIEA2017026
ISBN:

9781475577556
ISSN:

1018-5941

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