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Bank distress and the borrowers' productivity

  • Keiichiro Kobayashi

    (Research Institute of Economy, Trade, and Industry)

  • Noriyuki Yanagawa

    (Faculty of Economics, University of Toyama)

In this paper, we propose a theoretical model in which a banking crisis (or bank distress) causes declines in the aggregate productivity. When borrowing firms need additional bank loans to continue their businesses, a high probability of bank failure discourages ex ante investments (i.e., "specialization") by the firms that enhance their productivity. In a general equilibrium setting, we also show that there may be multiple equilibria, in one of which bank distress continues and the borrowers' productivity is low, and in the other equilibrium, banks are healthy and the borrowers' productivity is high. We show that the bank capital requirement may be effective to eliminate the bad equilibrium and may lead the economy to the good equilibrium in which the productivity of borrowing firms and the aggregate output are both high and the probability of bank failure is low.

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File URL: http://www.carf.e.u-tokyo.ac.jp/pdf/workingpaper/fseries/113.pdf
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Paper provided by Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo in its series CARF F-Series with number CARF-F-111.

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Length: 23 pages
Date of creation: Oct 2007
Date of revision:
Handle: RePEc:cfi:fseres:cf111
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  1. Lee E. Ohanian, 2001. "Why Did Productivity Fall So Much during the Great Depression?," American Economic Review, American Economic Association, vol. 91(2), pages 34-38, May.
  2. Fumio Hayashi & Edward C. Prescott, 2000. "The 1990s in Japan: a lost decade," Working Papers 607, Federal Reserve Bank of Minneapolis.
  3. Bengt Holmstrom & Jean Tirole, 1996. "Private and Public Supply of Liquidity," NBER Working Papers 5817, National Bureau of Economic Research, Inc.
  4. Alan D. Morrison & Lucy White, 2005. "Crises and Capital Requirements in Banking," American Economic Review, American Economic Association, vol. 95(5), pages 1548-1572, December.
  5. Fumio Hayashi & Edward C. Prescott, 2002. "Data Appendix to The 1990s in Japan: A Lost Decade," Technical Appendices hayashi02, Review of Economic Dynamics.
  6. Levine, Ross, 1996. "Financial development and economic growth : views and agenda," Policy Research Working Paper Series 1678, The World Bank.
  7. Morrison, Alan & White, Lucy, 2004. "Crises and Capital Requirements in Banking," CEPR Discussion Papers 4364, C.E.P.R. Discussion Papers.
  8. Franklin Allen & Douglas Gale, 1998. "Optimal Financial Crises," Journal of Finance, American Finance Association, vol. 53(4), pages 1245-1284, 08.
  9. Harold L. Cole & Lee E. Ohanian & Ron Leung, 2005. "Deflation and the International Great Depression: A Productivity Puzzle," NBER Working Papers 11237, National Bureau of Economic Research, Inc.
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