Bank Overleverage and Macroeconomic Fragility
AbstractThis paper develops a dynamic general equilibrium model that explicitly includes a banking sector engaged in a maturity mismatch. We demonstrate that rational competitive banks take on excessive risks systemically, resulting in overleverage and ine¢ ciently high crisis probabilities. The model accounts for the banks seemingly over-optimistic outlook about their own solvency and the asset prices, compared to the social optimum. The result calls for policy intervention to reduce the high crisis probabilities. To this end, the government can commit to bailing out banks through public supply of liquidity or a low-interest rate policy. As opposed to the intention of the government, however, expectations of a bailout could incentivize banks to be even more overleveraged, leaving the economy exposed to higher crisis probabilities.
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Bibliographic InfoPaper provided by Graduate School of Economics Project Center, Kyoto University in its series Discussion papers with number e-12-002.
Length: 60 pages
Date of creation: Apr 2012
Date of revision: Mar 2013
Contact details of provider:
Postal: Yoshida-Honmachi, Sakyo-ku, Kyoto 606-8501
Web page: http://www.econ.kyoto-u.ac.jp/projectcenter/
More information through EDIRC
Financial crisis; Liquidity shortage; Maturity mismatch; Credit externalities; Financial regulation;
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-2013-11-16 (All new papers)
- NEP-BAN-2013-11-16 (Banking)
- NEP-CBA-2013-11-16 (Central Banking)
- NEP-MAC-2013-11-16 (Macroeconomics)
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