Bank Overleverage and Macroeconomic Fragility
AbstractThis paper develops a dynamic general equilibrium model that explicitly includes a banking sector with a maturity mismatch. We demonstrate that, despite the perfect competition in the banking sector, rational banks take on excessive risks systemically, resulting in overleverage and inefficiently high crisis probabilities. The model accounts for the banks' rational over-optimism regarding future capital prices which arises from pecuniary externalities on their own solvency. Using the model as an example, we introduce MSR (marginal systemic risk) as a general measure to assess the macroeconomic exposure to systemic risks.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Institute for Monetary and Economic Studies, Bank of Japan in its series IMES Discussion Paper Series with number 11-E-15.
Date of creation: Jul 2011
Date of revision:
Contact details of provider:
Postal: 2-1-1 Nihonbashi, Hongoku-cho, Chuo-ku, Tokyo 103
Web page: http://www.imes.boj.or.jp/
More information through EDIRC
Financial crisis; Liquidity shortage; Maturity mismatch; Pecuniary externalities;
Other versions of this item:
- E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
- G01 - Financial Economics - - General - - - Financial Crises
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-07-27 (All new papers)
- NEP-BAN-2011-07-27 (Banking)
- NEP-BEC-2011-07-27 (Business Economics)
- NEP-CBA-2011-07-27 (Central Banking)
- NEP-DGE-2011-07-27 (Dynamic General Equilibrium)
- NEP-MAC-2011-07-27 (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.:
- Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, edition 1, volume 1, number 8973, May.
- Diamond, Douglas W & Dybvig, Philip H, 1983.
"Bank Runs, Deposit Insurance, and Liquidity,"
Journal of Political Economy,
University of Chicago Press, vol. 91(3), pages 401-19, June.
- Charles T. Carlstrom & Timothy S. Fuerst, 1996.
"Agency costs, net worth, and business fluctuations: a computable general equilibrium analysis,"
9602, Federal Reserve Bank of Cleveland.
- Carlstrom, Charles T & Fuerst, Timothy S, 1997. "Agency Costs, Net Worth, and Business Fluctuations: A Computable General Equilibrium Analysis," American Economic Review, American Economic Association, vol. 87(5), pages 893-910, December.
- Guido Lorenzoni, 2007.
"Inefficient Credit Booms,"
NBER Working Papers
13639, National Bureau of Economic Research, Inc.
- Césaire Meh & Kevin Moran, 2008.
"The Role of Bank Capital in the Propagation of Shocks,"
08-36, Bank of Canada.
- Meh, Césaire A. & Moran, Kevin, 2010. "The role of bank capital in the propagation of shocks," Journal of Economic Dynamics and Control, Elsevier, vol. 34(3), pages 555-576, March.
- Javier Bianchi, 2010. "Credit Externalities: Macroeconomic Effects and Policy Implications," American Economic Review, American Economic Association, vol. 100(2), pages 398-402, May.
- Naohisa Hirakata & Nao Sudo & Kozo Ueda, 2009. "Chained Credit Contracts and Financial Accelerators," IMES Discussion Paper Series 09-E-30, Institute for Monetary and Economic Studies, Bank of Japan.
- Enrique Mendoza & Javier Bianchi, 2010.
"Overborrowing, financial crises and ‘macro-prudential’ taxes,"
Federal Reserve Bank of San Francisco, issue Oct.
- Javier Bianchi & Enrique G. Mendoza, 2010. "Overborrowing, Financial Crises and 'Macro-prudential' Taxes," NBER Working Papers 16091, National Bureau of Economic Research, Inc.
- Ryo Kato, 2004.
"Liquidity, Infinite Horizons and Macroeconomic Fluctuations,"
Econometric Society 2004 Far Eastern Meetings
622, Econometric Society.
- Kato, Ryo, 2006. "Liquidity, infinite horizons and macroeconomic fluctuations," European Economic Review, Elsevier, vol. 50(5), pages 1105-1130, July.
- Robert J. Barro, 2007.
"Rare Disasters, Asset Prices, and Welfare Costs,"
NBER Working Papers
13690, National Bureau of Economic Research, Inc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Kinken).
If references are entirely missing, you can add them using this form.