Finding the Right Balance Credit Risk Vs. Market Risk: Managing the TradeOffs
Atif MianPrinceton University
What risks are more relevant today?
• I want to make two points:1. Bank “supply side” issues less important for
explaining business cycle fluctuations on the margin.
– Example: Syndicate loan market.
2. The key problem is an un-balanced world in terms of leverage, wealth distribution and market power.
– Examples: U.S., Europe, China
Syndicate loan market
• Syndicate loan volumes are highly cyclical, but– That is true for 2001 as well, not just 2008– A large share of cyclicality driven by maturity
management by highest quality firms• i.e. the marginal cyclical firm is the highest quality firm.
– Corporations hoard huge cash– No strong evidence that bank supply side
quantitatively important for explaining changes in real variables in recent years.
The global re-balancing problem
• US– Rapid rise in inequality– Debt mutes the real consequences for a while– A sharp hit to wealth inequality– Large disparity in marginal propensity to consume
across savers – debtors. => low rates and low growth
U.S. inequality over time (1913-2008)
Source: Emmanuel Saez and Thomas Piketty
U.S. HH Debt to GDP: 1916-today
Source: Credit Suisse
• The poorest are the most levered!0
.2.4
.6.8
1
Poorest 20% 2 3 4 Richest 20%
Chart 1.1: Leverage Ratio for HomeownersBy Net Worth Quntile
Debt Net Worth
Debt and Net Wealth
Wealth inequality shock0
1020
30$
thous
ands
1992 1995 1998 2001 2004 2007 2010
Poorest 20%
150
200
250
$ tho
usan
ds
1992 1995 1998 2001 2004 2007 2010
Middle 20%
1500
2000
2500
3000
3500
$ tho
usan
ds1992 1995 1998 2001 2004 2007 2010
Richest 20%
Chart 2.2: Net Worth, Lowest, Median, and Highest Networth Quintiles
Disparity in MPC
0.0
05
.01
.01
5.0
2.0
25
.03
Ma
rgin
al p
rope
nsity
to s
pen
d on
aut
oso
ut o
f ho
usin
g w
ealth
Lev
<=
30
%
30%
< L
ev <
= 5
0%
50%
< L
ev <
= 7
0%
70%
< L
ev <
= 9
0%
90%
< L
ev
Market power and technology?
China re-balancing challege
Diminishing capital return
What gives?