Research Summary
Research Summary
Overview
Description
Professor Begenau’s research agenda is directed at better understanding how financial markets work and how they affect the real economy. She uses quantitative analysis to build both prescriptive and descriptive models concerning financial risk in banking, and she also studies how nonfinancial firms employ different finance strategies throughout the business cycle.
Determining Optimal Capital Requirements for Banks
Professor Begenau has constructed a dynamic general equilibrium model to determine the optimal capital requirement for U.S. banks. The model takes into account three salient facts: banks are a key part of production; they provide liquidity in the form of bank debt (deposits), which households value; and they benefit from a government subsidy that motivates them to take on excessive risk. Quantifying the model and testing it against the business cycle, she finds that higher capital requirements lower risk taking and increase consumption, but they also reduce the supply of bank debt, leading to lower interest rates on deposits. These lower rates reduce banks’ overall funding costs, allowing them to increase lending. This growth in lending, in turn, increases banks’ capital stock, which raises both production and consumption. The optimal capital requirement weighs the reduction in banks’ risking taking and the increase in consumption against the reduction in deposits. The model indicates that the optimal capital requirement is 14 percent equity as a share of risk-weighted assets.
Risk Exposure of Banks
Professor Begenau and her co-authors have developed a novel method to assess exposure to interest-rate and default risk among large U.S. banks. The factor structure in interest rates makes it possible to represent many bank positions as rather simple portfolios. This method enables her to compare risk exposure from derivatives to that from banks’ balance sheets. This comparison has revealed that the derivatives business increases exposure to interest-rate risk rather than, as widely assumed, hedging it. In a related study of broad credit market positions, Professor Begenau and her co-authors argue that the risk exposure of the financial sector could be more readily understood by integrating measures of economic analysis with accounting measures.
Firm Financing and the Business Cycle
Professor Begenau and her co-author study the financing behavior of firms over the business cycle, demonstrating that external financing behavior depends on the state of the real economy as well as on financial frictions. Large firms finance themselves with debt in economic booms and switch to equity financing in recessions. Small firms, however, increase debt and equity in booms, and reduce their external funding in recessions. Professor Begenau uses a firm optimization model to explain the cyclical nature of firm financing. Because small firms are far from their efficient scale, their need for funding is higher than that of large firms, especially during booms, while the large firms that are closer to their efficient scale use internal funds and debt during these periods.
Determining Optimal Capital Requirements for Banks
Professor Begenau has constructed a dynamic general equilibrium model to determine the optimal capital requirement for U.S. banks. The model takes into account three salient facts: banks are a key part of production; they provide liquidity in the form of bank debt (deposits), which households value; and they benefit from a government subsidy that motivates them to take on excessive risk. Quantifying the model and testing it against the business cycle, she finds that higher capital requirements lower risk taking and increase consumption, but they also reduce the supply of bank debt, leading to lower interest rates on deposits. These lower rates reduce banks’ overall funding costs, allowing them to increase lending. This growth in lending, in turn, increases banks’ capital stock, which raises both production and consumption. The optimal capital requirement weighs the reduction in banks’ risking taking and the increase in consumption against the reduction in deposits. The model indicates that the optimal capital requirement is 14 percent equity as a share of risk-weighted assets.
Risk Exposure of Banks
Professor Begenau and her co-authors have developed a novel method to assess exposure to interest-rate and default risk among large U.S. banks. The factor structure in interest rates makes it possible to represent many bank positions as rather simple portfolios. This method enables her to compare risk exposure from derivatives to that from banks’ balance sheets. This comparison has revealed that the derivatives business increases exposure to interest-rate risk rather than, as widely assumed, hedging it. In a related study of broad credit market positions, Professor Begenau and her co-authors argue that the risk exposure of the financial sector could be more readily understood by integrating measures of economic analysis with accounting measures.
Firm Financing and the Business Cycle
Professor Begenau and her co-author study the financing behavior of firms over the business cycle, demonstrating that external financing behavior depends on the state of the real economy as well as on financial frictions. Large firms finance themselves with debt in economic booms and switch to equity financing in recessions. Small firms, however, increase debt and equity in booms, and reduce their external funding in recessions. Professor Begenau uses a firm optimization model to explain the cyclical nature of firm financing. Because small firms are far from their efficient scale, their need for funding is higher than that of large firms, especially during booms, while the large firms that are closer to their efficient scale use internal funds and debt during these periods.