Topic: Held-to-Maturity Securities and Bank Runs

Speaker: Kaiji Chen, Professor of Economics, Emory University

Time: 10:00am-11:30am, Wednesday, May 14

Location: 4-101

Abstract:

How do Held-to-Maturity (HTM) securities that limit the impacts of banks’ unrealized capital loss on the regulatory capital measures affect banks’ exposure to deposit run risks when policy rates increase? And how should regulators design policies on classifying securities as HTM jointly with bank capital regulation? To answer these questions, we develop a model of bank runs in which banks classify long-term assets as HTM or Asset-for-Sale (AFS). Banks trade off the current cost of issuing equity to meet the capital requirement when the interest rate increases against increasing future run risks when the interest rate increases further in the future. When banks underestimate interest rate risks or have limited liability to depositors in the event of default, capping held-to-maturity long-term assets and mandating more equity capital issuance may reduce the run risks of moderately capitalized banks. Using bank-quarter-level data from Call Reports, we provide empirical support for the model’s testable implications.

Speaker Biography:

Professor Chen's current research interests are China's Macroeconomics, Financial Aspects of Macroeconomics and Fiscal Policies. He has published about a dozen papers on top academic journals such as American Economic Review, Journal of Finance, NBER Macroeconomic Annual, American Economic Journal: Macroeconomics and Journal of Monetary Economics. In recent years, his research focuses on China's macro economy, especially its relationship with the financial sector and monetary policy. His research topics include China's real estate bubble, shadow banking and monetary policy, economic cycle and trends, etc. His research results have been reported by many international financial and economic media including the Wall Street Journal. In August 2016, Professor Chen was awarded a grant from the National Science Foundation to further explore his research project, entitled "Quantifying the Interactions Between the Financial Sector and the Macroeconomy in China: A Structural Approach." In 2018, he got the 3rd Sun Yefang Financial Inovation Award.

Professor Chen earned his doctor degree in Economics from University of Southern California in 2005, his master degree in Economics from Fudan University in 2000 and his bachelor degree in Economics from Shanghai Institute of Foreign Trade in 1997.