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Financial intermediation, agency, and collateral and the dynamics of banking crises: theory and evidence for the Japanese banking crisis

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  • Robert Dekle
  • Kenneth Kletzer

Abstract

We outline a model of an endogenously evolving banking crisis in a growing economy subject to either idiosyncratic or aggregate productivity shocks. The model incorporates agency problems at two levels: between firms and their banks and between banks and the banks' depositors and deposit insurers. In equilibrium, banks have an incentive to renegotiate loans to insolvent firms, leading to an increasing contingent liability of the government with deposit insurance and regulatory forbearance. The growth rate of output is endogenous, and we explain how the agency problems affect the qualitative dynamics of the economy in this framework. We find that the dynamics predicted by our model fit the recent behavior of the Japanese economy well. As Japan was hit by a succession of adverse aggregate shocks in the 1990s, bank portfolios continued to deteriorate and the market value of collateral (land) collapsed. The decline in collateral values led to a fall in bank lending, a decline in physical investment, and finally, a fall in GDP.

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  • Robert Dekle & Kenneth Kletzer, 2002. "Financial intermediation, agency, and collateral and the dynamics of banking crises: theory and evidence for the Japanese banking crisis," Pacific Basin Working Paper Series 2002-10, Federal Reserve Bank of San Francisco.
  • Handle: RePEc:fip:fedfpb:2002-10
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    References listed on IDEAS

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    2. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics,in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393 Elsevier.
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    Cited by:

    1. Dekle, Robert & Kletzer, Kenneth, 2003. "The Japanese banking crisis and economic growth: Theoretical and empirical implications of deposit guarantees and weak financial regulation," Journal of the Japanese and International Economies, Elsevier, vol. 17(3), pages 305-335, September.
    2. Robert Dekle & Kenneth Kletzer, 2004. "Deposit Insurance, Regulatory Forbearance and Economic Growth: Implications for the Japanese Banking Crisis," CESifo Working Paper Series 1136, CESifo Group Munich.

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