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.
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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:
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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)
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