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Bank Fragility and Growth Expectations

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  • Proto Eugenio

    (University of Warwick)

Abstract

Banks supply liquidity to insure individuals against possible short-term consumption shocks. The higher this level of illiquidity insurance the lower the investments in long run assets, and the higher the risk of a bank run generated by a real negative shock. If individuals are sufficiently risk averse, competitive banks trade off liquidity insurance for portfolio risk. High growth expectations, typical of emerging economies, increase the optimal liquidity supply even when this increases the risk of a bank run. On the contrary, deposit contracts offered when economic performances are very uncertain (like in less developed economies), and where output fluctuations are milder (like in developed economies), are less exposed to the risk of a bank run. In this setting, a bail-out in case of crisis is ex-ante Pareto efficient even if it always increases the risk of crisis.

Suggested Citation

  • Proto Eugenio, 2007. "Bank Fragility and Growth Expectations," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 7(1), pages 1-32, November.
    • Handle: RePEc:bpj:bejeap:v:7:y:2007:i:1:n:55
    DOI: 10.2202/1935-1682.1720
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    1. Maggie Cahalan & Wendy Mansfield & Natalie Justh, "undated". "The Status of Academic Libraries in the United States: Results from the 1996 Academic Library Survey with Historical Comparisons," Mathematica Policy Research Reports e75b610016454595b8935532e, Mathematica Policy Research.
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