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Finding the Right Balance Credit Risk Vs. Market Risk: Managing the TradeOffs

Finding the Right Balance Credit Risk Vs. Market Risk: Managing the TradeOffs. Atif Mian Princeton University. What risks are more relevant today?. I want to make two points: Bank “supply side” issues less important for explaining business cycle fluctuations on the margin.

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Finding the Right Balance Credit Risk Vs. Market Risk: Managing the TradeOffs

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  1. Finding the Right Balance Credit Risk Vs. Market Risk: Managing the TradeOffs Atif Mian Princeton University

  2. What risks are more relevant today? • I want to make two points: • Bank “supply side” issues less important for explaining business cycle fluctuations on the margin. • Example: Syndicate loan market. • The key problem is an un-balanced world in terms of leverage, wealth distribution and market power. • Examples: U.S., Europe, China

  3. 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.

  4. 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

  5. U.S. inequality over time (1913-2008) Source: Emmanuel Saez and Thomas Piketty

  6. U.S. HH Debt to GDP: 1916-today Source: Credit Suisse

  7. Debt and Net Wealth • The poorest are the most levered!

  8. Wealth inequality shock

  9. Disparity in MPC

  10. Market power and technology?

  11. China re-balancing challege

  12. A country saving twice!

  13. Diminishing capital return

  14. What gives?

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