Liquidity Transformation and Bank Capital Requirements
AbstractThis paper presents a dynamic general equilibrium model where asymmetric information about asset quality leads to asset illiquidity. Banking arises endogenously in this environment as banks can pool illiquid assets to average out their idiosyncratic qualities and issue liquid liabilities backed by pooled assets whose total quality is public information. Moreover, the liquidity mismatch in banks' balance sheets leads to endogenous bank capital (outside equity) requirements for preventing bank runs. The model indicates that banking has both positive and negative effects on long-run economic growth and that business-cycle dynamics of asset prices, asset illiquidity and bank capital requirements are interconnected.
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Bibliographic InfoPaper provided by Bank of Canada in its series Working Papers with number 10-22.
Length: 68 pages
Date of creation: 2010
Date of revision:
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Financial stability; Financial system regulation and policies;
Find related papers by JEL classification:
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
This paper has been announced in the following NEP Reports:
- NEP-ACC-2010-08-28 (Accounting & Auditing)
- NEP-ALL-2010-08-28 (All new papers)
- NEP-BAN-2010-08-28 (Banking)
- NEP-BEC-2010-08-28 (Business Economics)
- NEP-CBA-2010-08-28 (Central Banking)
- NEP-CTA-2010-08-28 (Contract Theory & Applications)
- NEP-DGE-2010-08-28 (Dynamic General Equilibrium)
- NEP-FDG-2010-08-28 (Financial Development & Growth)
- NEP-MAC-2010-08-28 (Macroeconomics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- Liquidity Transformation and Bank Capital Requirements
by Christian Zimmermann in NEP-DGE blog on 2010-08-31 17:22:25
- Hajime Tomura, 2012. "Asset Illiquidity and Market Shutdowns in Competitive Equilibrium," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(3), pages 283-294, July.
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