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Asset Illiquidity and Dynamic Bank Capital Requirements

Author

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  • Hajime Tomura

    (University of Tokyo)

Abstract

This paper introduces banks into a dynamic stochastic general equilibrium model by featuring asymmetric information as the underlying friction for banking. Asymmetric information about asset qualities causes a lemons problem in the asset market. In this environment, banks can issue liquid liabilities by pooling illiquid assets contaminated by asymmetric information. The liquidity transformation by banks results in a minimum value of common equity that banks must issue to avoid a run. This value increases with downside risk to the asset price and the expected degree of asset illiquidity. It rises during a boom if productivity shocks cause the business cycle.

Suggested Citation

  • Hajime Tomura, 2014. "Asset Illiquidity and Dynamic Bank Capital Requirements," International Journal of Central Banking, International Journal of Central Banking, vol. 10(3), pages 1-47, September.
  • Handle: RePEc:ijc:ijcjou:y:2014:q:3:a:8
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    References listed on IDEAS

    as
    1. Kato, Ryo, 2006. "Liquidity, infinite horizons and macroeconomic fluctuations," European Economic Review, Elsevier, vol. 50(5), pages 1105-1130, July.
    2. Douglas W. Diamond & Raghuram G. Rajan, 2000. "A Theory of Bank Capital," Journal of Finance, American Finance Association, vol. 55(6), pages 2431-2465, December.
    3. Francisco Covas & Shigeru Fujita, 2010. "Procyclicality of Capital Requirements in a General Equilibrium Model of Liquidity Dependence," International Journal of Central Banking, International Journal of Central Banking, vol. 6(34), pages 137-173, December.
    4. Douglas Gale, 1992. "A Walrasian Theory of Markets with Adverse Selection," Review of Economic Studies, Oxford University Press, vol. 59(2), pages 229-255.
    5. Hajime Tomura, 2012. "Asset Illiquidity and Market Shutdowns in Competitive Equilibrium," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(3), pages 283-294, July.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Claire Océane Chevallier & Sarah El Joueidi, 2016. "Regulation and Rational Banking Bubbles in Infinite Horizon," CREA Discussion Paper Series 16-15, Center for Research in Economic Analysis, University of Luxembourg.
    2. Ornella Tarola & Giulia Ceccantoni & Skerdilajda Zanaj, 2016. "Green consumption and relative preferences in an international oligopoly," CREA Discussion Paper Series 16-16, Center for Research in Economic Analysis, University of Luxembourg.
    3. repec:eee:jmacro:v:54:y:2017:i:pb:p:285-305 is not listed on IDEAS

    More about this item

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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