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Bubbles, banks and financial stability


  • Kalin Nikolov


Asset price bubbles are considered to be a major risk to financial stability. In this article, we show that an asset price bubble poses a bigger risk when banks are exposed to it. This is because when the bubble bursts, banks realise losses and this may trigger bank failures and a credit crunch. In contrast, when overvalued assets are held by ordinary savers, the consequences for financial stability are less severe. We show that low bank profitability and a generous financial safety net for banks are important determinants in their decisions to take risks. JEL Classification: G0

Suggested Citation

  • Kalin Nikolov, 2012. "Bubbles, banks and financial stability," Research Bulletin, European Central Bank, vol. 15, pages 2-6.
  • Handle: RePEc:ecb:ecbrbu:2012:0015:1

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    References listed on IDEAS

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    Cited by:

    1. Alberto Martin & Jaume Ventura, 2017. "The macroeconomics of rational bubbles: a user's guide," Economics Working Papers 1581, Department of Economics and Business, Universitat Pompeu Fabra.
    2. Basco, Sergi, 2016. "Switching bubbles: From Outside to Inside Bubbles," European Economic Review, Elsevier, vol. 87(C), pages 236-255.
    3. repec:wly:japmet:v:32:y:2017:i:2:p:296-317 is not listed on IDEAS
    4. Takuma Kunieda & Tarishi Matsuoka & Akihisa Shibata, 2017. "Asset Bubbles, Technology Choice, and Financial Crises," Discussion Paper Series 157, School of Economics, Kwansei Gakuin University, revised Feb 2017.
    5. Hirano, Tomohiro & Inaba, Masaru & Yanagawa, Noriyuki, 2015. "Asset bubbles and bailouts," Journal of Monetary Economics, Elsevier, vol. 76(S), pages 71-89.
    6. Kosuke Aoki & Nao Sudo, 2012. "Asset Portfolio Choice of Banks and Inflation Dynamics," Bank of Japan Working Paper Series 12-E-5, Bank of Japan.
    7. Bernd Schwaab & Siem Jan Koopman & André Lucas, 2017. "Global Credit Risk: World, Country and Industry Factors," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 32(2), pages 296-317, March.
    8. repec:eee:ecmode:v:64:y:2017:i:c:p:117-127 is not listed on IDEAS
    9. Aoki, Kosuke & Nakajima, Tomoyuki & Nikolov, Kalin, 2014. "Safe asset shortages and asset price bubbles," Journal of Mathematical Economics, Elsevier, vol. 53(C), pages 164-174.
    10. Tomohiro Hirano & Noriyuki Yanagawa, 2010. "Asset Bubbles, Endogenous Growth, and Financial Frictions," CIRJE F-Series CIRJE-F-752, CIRJE, Faculty of Economics, University of Tokyo.
    11. Alberto Martin & Jaume Ventura, 2016. "Managing Credit Bubbles," Journal of the European Economic Association, European Economic Association, vol. 14(3), pages 753-789, June.
    12. Caterina Mendicino & Kalin Nikolov & Javier Suarez & Dominik Supera, 2016. "Optimal Dynamic Capital Requirements," Working Papers wp2016_1614, CEMFI.
    13. Angeloni, I., 2014. "European macroprudential policy from gestation to infancy," Financial Stability Review, Banque de France, issue 18, pages 71-84, April.
    14. Keiichiro Kobayashi, 2015. "Public Debt Overhang and Economic Growth," Public Policy Review, Policy Research Institute, Ministry of Finance Japan, vol. 11(2), pages 247-276, March.
    15. Hirano, Tomohiro & Inaba, Masaru, 2010. "Asset Price Bubbles in the Kiyotaki-Moore Model," MPRA Paper 36632, University Library of Munich, Germany.
    16. Xavier Freixas & David Perez-Reyna, 2017. "The Gilded Bubble Buffer," DOCUMENTOS CEDE 015789, UNIVERSIDAD DE LOS ANDES-CEDE.
    17. Kosuke Aoki & Kalin Nikolov, 2015. "Financial Disintermediation and Financial Fragility," CARF F-Series CARF-F-374, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    18. Takuma Kunieda & Ken-ichi Hashimoto & Ryonghun Im, 2017. "Asset Bubbles, Unemployment, and a Financial Crisis," Discussion Paper Series 156, School of Economics, Kwansei Gakuin University, revised Feb 2017.

    More about this item


    financial stability;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy


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