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Bank Leverage and Social Welfare

Author

Listed:
  • Lawrence Christiano
  • Daisuke Ikeda

Abstract

We describe a general equilibrium model in which an agency problem arises because bankers must exert an unobserved and costly effort to perform their task. Suppose aggregate banker net worth is too low to insulate creditors from bad outcomes on their balance sheet. Then, banks borrow too much in equilibrium because there is a pecuniary externality associated with bank borrowing. Social welfare is increased by imposing a binding leverage restriction on banks. We formalize this argument and provide a numerical example.

Suggested Citation

  • Lawrence Christiano & Daisuke Ikeda, 2016. "Bank Leverage and Social Welfare," American Economic Review, American Economic Association, vol. 106(5), pages 560-564, May.
    • Handle: RePEc:aea:aecrev:v:106:y:2016:i:5:p:560-64
    Note: DOI: 10.1257/aer.p20161090
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    Citations

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    Cited by:

    1. Mendicino, Caterina & Nikolov, Kalin & Suarez, Javier & Supera, Dominik, 2020. "Bank capital in the short and in the long run," Journal of Monetary Economics, Elsevier, vol. 115(C), pages 64-79.
    2. Tirupam Goel & Isha Agarwal, 2021. "Limits of stress-test based bank regulation," BIS Working Papers 953, Bank for International Settlements.
    3. Darracq Pariès, Matthieu & Körner, Jenny & Papadopoulou, Niki, 2019. "Empowering central bank asset purchases: The role of financial policies," Working Paper Series 2237, European Central Bank.
    4. Daisuke Ikeda & Hidehiko Matsumoto, 2021. "Procyclical Leverage and Crisis Probability in a Macroeconomic Model of Bank Runs," IMES Discussion Paper Series 21-E-01, Institute for Monetary and Economic Studies, Bank of Japan.
    5. Lawrence Christiano & Husnu Dalgic & Xiaoming Li, 2022. "Modelling the Great Recession as a Bank Panic: Challenges," Economica, London School of Economics and Political Science, vol. 89(S1), pages 200-238, June.
    6. Begenau, Juliane, 2020. "Capital requirements, risk choice, and liquidity provision in a business-cycle model," Journal of Financial Economics, Elsevier, vol. 136(2), pages 355-378.
    7. Ferrero, Andrea & Harrison, Richard & Nelson, Ben, 2018. "Concerted efforts? Monetary policy and macro-prudential tools," Bank of England working papers 727, Bank of England.
    8. Ferrero, Andrea & Harrison, Richard & Nelson, Benjamin, 2018. "House Price Dynamics, Optimal LTV Limits and the Liquidity Trap," CEPR Discussion Papers 13400, C.E.P.R. Discussion Papers.
    9. Burkhard Raunig & Michael Sigmund, 2022. "The ECB Single Supervisory Mechanism: Effects on Bank Performance and Capital Requirements (Burkhard Raunig, Michael Sigmund)," Working Papers 244, Oesterreichische Nationalbank (Austrian Central Bank).

    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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