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Liquidity Transformation and Bank Capital Requirements

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  • Hajime Tomura

Abstract

This 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 Info

Paper provided by Bank of Canada in its series Working Papers with number 10-22.

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Length: 68 pages
Date of creation: 2010
Date of revision:
Handle: RePEc:bca:bocawp:10-22

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Keywords: Financial stability; Financial system regulation and policies;

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References

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  1. Edward J. Green, 1995. "Implementing Efficient Allocations in a Model of Financial Intermediation," Meeting papers 9506001, EconWPA.
  2. Ryo Kato, 2004. "Liquidity, Infinite Horizons and Macroeconomic Fluctuations," Econometric Society 2004 Far Eastern Meetings 622, Econometric Society.
  3. Eisfeldt, Andrea L. & Rampini, Adriano A., 2006. "Capital reallocation and liquidity," Journal of Monetary Economics, Elsevier, vol. 53(3), pages 369-399, April.
  4. Andrea L. Eisfeldt, 2004. "Endogenous Liquidity in Asset Markets," Journal of Finance, American Finance Association, vol. 59(1), pages 1-30, 02.
  5. Andolfatto, David & Nosal, Ed, 2008. "Bank incentives, contract design and bank runs," Journal of Economic Theory, Elsevier, vol. 142(1), pages 28-47, September.
  6. Gorton, Gary & Pennacchi, George, 1990. " Financial Intermediaries and Liquidity Creation," Journal of Finance, American Finance Association, vol. 45(1), pages 49-71, March.
  7. Williamson, Stephen D, 1987. "Financial Intermediation, Business Failures, and Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 95(6), pages 1196-1216, December.
  8. Peck, James & Shell, Karl, 2001. "Equilibrium Bank Runs," Working Papers 01-10r, Cornell University, Center for Analytic Economics.
  9. Chen, Nan-Kuang, 2001. "Bank net worth, asset prices and economic activity," Journal of Monetary Economics, Elsevier, vol. 48(2), pages 415-436, October.
  10. Ennis, Huberto M. & Keister, Todd, 2009. "Run equilibria in the Green-Lin model of financial intermediation," Journal of Economic Theory, Elsevier, vol. 144(5), pages 1996-2020, September.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Liquidity Transformation and Bank Capital Requirements
    by Christian Zimmermann in NEP-DGE blog on 2010-08-31 17:22:25
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
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Cited by:
  1. 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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