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

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5.0

2.0

25

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ealth

Lev

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30%

< L

ev <

= 5

0%

50%

< L

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70%

< L

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90%

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ev

Market power and technology?

China re-balancing challege

A country saving twice!

Diminishing capital return

What gives?