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Uncertainty and Investment: The Financial Intermediary Balance Sheet Channel

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  • Sophia Chen

Abstract

Rollover risk imposes market discipline on banks’ risk-taking behavior but it can be socially costly. I present a two-sided model in which a bank simultaneously lends to a firm and borrows from the short-term funding market. When the bank is capital constrained, uncertainty in asset quality and rollover risk create a negative externality that spills over to the real economy by ex ante credit contraction. Macroprudential and monetary policies can be used to reduce the social cost of market discipline and improve efficiency.

Suggested Citation

  • Sophia Chen, 2015. "Uncertainty and Investment: The Financial Intermediary Balance Sheet Channel," IMF Working Papers 2015/065, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2015/065
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    Cited by:

    1. Naoto Okahara, 2019. "Banks’ disclosure of information and financial stability regulations," Evolutionary and Institutional Economics Review, Springer, vol. 16(1), pages 91-115, June.
    2. Panagiotidis, Theodore & Printzis, Panagiotis, 2020. "What is the investment loss due to uncertainty?," Global Finance Journal, Elsevier, vol. 45(C).

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