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Financial intermediation, agency, and collateral and the dynamics of banking crises: theory and evidence for the Japanese banking crisis

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  • Robert Dekle
  • Kenneth Kletzer

Abstract

We outline a model of an endogenously evolving banking crisis in a growing economy subject to either idiosyncratic or aggregate productivity shocks. The model incorporates agency problems at two levels: between firms and their banks and between banks and the banks' depositors and deposit insurers. In equilibrium, banks have an incentive to renegotiate loans to insolvent firms, leading to an increasing contingent liability of the government with deposit insurance and regulatory forbearance. The growth rate of output is endogenous, and we explain how the agency problems affect the qualitative dynamics of the economy in this framework. We find that the dynamics predicted by our model fit the recent behavior of the Japanese economy well. As Japan was hit by a succession of adverse aggregate shocks in the 1990s, bank portfolios continued to deteriorate and the market value of collateral (land) collapsed. The decline in collateral values led to a fall in bank lending, a decline in physical investment, and finally, a fall in GDP.

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Bibliographic Info

Paper provided by Federal Reserve Bank of San Francisco in its series Pacific Basin Working Paper Series with number 2002-10.

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Date of creation: 2002
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Handle: RePEc:fip:fedfpb:2002-10

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  1. Menzie D. Chinn & Kenneth M. Kletzer, 1999. "International capital inflows, domestic financial intermediation and financial crises under imperfect information," Proceedings, Federal Reserve Bank of San Francisco, issue Sep.
  2. Marcus H. Miller & Lei Zhang, 1999. "Sovereign Liquidity Crisis: The Strategic Case for A Payments Standstill," Working Paper Series WP99-8, Peterson Institute for International Economics.
  3. Holmström, Bengt & Tirole, Jean, 1994. "Financial Intermediation, Loanable Funds and the Real Sector," IDEI Working Papers 40, Institut d'Économie Industrielle (IDEI), Toulouse.
  4. Sebastian Edwards & Jeffrey A. Frankel, 2002. "Preventing Currency Crises in Emerging Markets," NBER Books, National Bureau of Economic Research, Inc, number edwa02-2.
  5. Mankiw, N Gregory, 1986. "The Allocation of Credit and Financial Collapse," The Quarterly Journal of Economics, MIT Press, vol. 101(3), pages 455-70, August.
  6. Michael P. Dooley & Jeffrey A. Frankel, 2003. "Managing Currency Crises in Emerging Markets," NBER Books, National Bureau of Economic Research, Inc, number dool03-1.
  7. Robert Dekle & Kenneth Kletzer, 2002. "Domestic Bank Regulation and Financial Crises: Theory and Empirical Evidence from East Asia," NBER Chapters, in: Preventing Currency Crises in Emerging Markets, pages 507-558 National Bureau of Economic Research, Inc.
  8. repec:fth:osakae:505 is not listed on IDEAS
  9. Ben Bernanke & Mark Gertler & Simon Gilchrist, 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," NBER Working Papers 6455, National Bureau of Economic Research, Inc.
  10. Bernanke, Ben & Gertler, Mark, 1990. "Financial Fragility and Economic Performance," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 87-114, February.
  11. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
  12. Xavier Freixas & Jean-Charles Rochet, 1997. "Microeconomics of Banking," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061937, December.
  13. Lawrence J. Christiano & Christopher Gust & Jorge Roldos, 2000. "Monetary Policy in an International Financial Crisis," Econometric Society World Congress 2000 Contributed Papers 1814, Econometric Society.
  14. Ogawa, K. & Kitasaka, S.-I., 2000. "Bank Lending in Japan: its Determinants and Macroeconomic Implications," ISER Discussion Paper 0505, Institute of Social and Economic Research, Osaka University.
  15. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  16. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
  17. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  18. Thomas F. Cargill & Michael M. Hutchison & Takatoshi Ito, 1997. "The Political Economy of Japanese Monetary Policy," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262032473, December.
  19. Takeo Hoshi & Anil Kashyap, 1999. "The Japanese Banking Crisis: Where Did It Come From and How Will It End?," NBER Working Papers 7250, National Bureau of Economic Research, Inc.
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