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Working Paper
Intermediation in Networks
I study intermediation in networked markets using a stochastic model of multilateral bargaining in which players compete on different routes through the network. I characterize stationary equilibrium payoffs as the fixed point of a set of intuitive value function equations and study efficiency and the impact of network structure on payoffs. There is never too little trade but there may be an inefficiency through too much trade in states where delay would be efficient. With homogeneous trade surplus the payoffs for players that are not essential to a trade opportunity go to zero as trade ...
Working Paper
Filling in the Blanks: Network Structure and Interbank Contagion
The network pattern of financial linkages is important in many areas of banking and finance. Yet bilateral linkages are often unobserved, and maximum entropy serves as the leading method for estimating counterparty exposures. This paper proposes an efficient alternative that combines information-theoretic arguments with economic incentives to produce more realistic interbank networks that preserve important characteristics of the original interbank market. The method loads the most probable links with the largest exposures consistent with the total lending and borrowing of each bank, yielding ...
Speech
Treasury Market Liquidity and Early Lessons from the Pandemic Shock
Remarks at Brookings-Chicago Booth Task Force on Financial Stability (TFFS) meeting, panel on market liquidity (delivered via videoconference).
Working Paper
The Effect of Primary Dealer Constraints on Intermediation in the Treasury Market
Using confidential microdata, we show that shocks to primary dealers’ risk-bearing constraints have significant effects on the US Treasury securities market. In response to tighter constraints, dealers reduce their Treasury positions, triggering a reduction in aggregate turnover and an increase in bid–ask spreads. These effects are more pronounced in securities that contribute more to the utilization of risk constraints. The impaired intermediation also affects Treasury yields, amplifying the yield response to net demand shifts. Moreover, tighter dealer constraints weaken Treasury auction ...
Briefing
Intermediation and Bank Liquidity: A Conference Recap
How might a central bank digital currency alter banking system operations? What is the effect of credit easing on the dynamics of bank runs? Does increased competition among banks mean a more fragile banking system, and what can be done about it? These were among the research questions addressed by economists during a recent Richmond Fed research conference.
Working Paper
Frictional Intermediation in Over-the-Counter Markets
We extend Duffie, G?arleanu, and Pedersen?s (2005) search theoretic model of over-the-counter (OTC) asset markets, allowing for a decentralized inter-dealer market with arbitrary heterogeneity in dealers? valuations or inventory costs. We develop a solution technique that makes the model fully tractable and allows us to derive, in closed form, theoretical formulas for key statistics analyzed in empirical studies of the intermediation process in OTC markets. A calibration to the market for municipal securities reveals that the model can generate trading patterns and prices that are ...
Working Paper
Central Bank Digital Currency: Central Banking for All?
The introduction of a central bank digital currency (CBDC) allows the central bank to engage in large-scale intermediation by competing with private financial interme-diaries for deposits. Yet, since a central bank is not an investment expert, it cannot invest in long-term projects itself, but relies on investment banks to do so. We derive an equivalence result that shows that absent a banking panic, the set of allocations achieved with private financial intermediation will also be achieved with a CBDC. Dur-ing a panic, however, we show that the rigidity of the central bank’s contract ...
Working Paper
An Information-Based Theory of Financial Intermediation
We advance a theory of how private information and heterogeneous screening ability across market participants shapes trade in decentralized asset markets. We solve for the equilibrium market structure and show that the investors who intermediate trade the most and interact with the largest set of counterparties must have the highest screening ability. That is, the primary intermediaries are those with superior information?screening experts. We provide empirical support for the model?s predictions using transaction-level micro data and information disclosure requirements. Finally, we study the ...
Working Paper
More on Middlemen: Equilibrium Entry and Efficiency in Intermediated Markets
This paper generalizes Rubinstein and Wolinsky?s model of middlemen (intermediation) by incorporating production and search costs, plus more general matching and bargaining. This allows us to study many new issues, including entry, efficiency and dynamics. In the benchmark model, equilibrium exists uniquely, and involves production and intermediation for some parameters but not others. Sometimes intermediation is essential: the market operates iff middlemen are active. If bargaining powers are set correctly equilibrium is efficient; if not there can be too much or too little economic ...
Report
Hybrid intermediaries
I introduce the concept of hybrid intermediaries: financial conglomerates that control a multiplicity of entity types active in the ?assembly line? process of modern financial intermediation, a system that has become known as shadow banking. The complex bank holding companies of today are the best example of hybrid intermediaries, but I argue that financial firms from the ?nonbank? space can just as easily evolve into conglomerates with similar organizational structure, thus acquiring the capability to engage in financial intermediation. I document instances of the emergence and growth of ...