Proprietary trading: evidence from the crisis

Francesc R. Tous, Puriya Abbassi, Rajkamal Iyer, José-Luis Peydró.

What are the consequences of proprietary trading? Banks typically hold and trade a significant amount of securities, and during the financial crisis, many of these securities suffered strong price declines. How did banks react? This is precisely what we investigate for the case of Germany in a recently published paper. We find that some banks increased their investments in securities, especially for those securities that suffered price drops. This strategy delivered high returns; but at the same time, these banks pulled back on lending to the real economy, since during the financial crisis they could not easily raise new (long-term) funding. Our findings suggest that proprietary trading during a crisis can lead to less lending to the real sector.

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How did the Bank’s forecasts perform before, during and after the crisis?

Nicholas Fawcett, Riccardo Masolo, Lena Koerber, Matt Waldron.

Introduction: forecasting and policy-making

Forecasting is difficult, especially when it concerns the future.  If we needed a reminder, the 2008-09 financial crisis demonstrated that macroeconomic forecasts can be highly inaccurate when the economy is buffeted by large shocks (see, for example, Figure 1).  But that is not a good reason to avoid forecasting: monetary policy takes time to work, so forecasts are indispensable in monetary policymaking.  Instead, we need to understand how different models behave in the eye of the storm: do some cope better during breaks and crises than others?  And can we make better forecasts by using information that is not normally included in economic models?

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