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Bank Overleverage and Macroeconomic Fragility


  • Ryo Kato

    (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:

  • Takayuki Tsuruga

    (Associate Professor, Graduate School of Economics, Kyoto University, (E-mail:


This paper develops a dynamic general equilibrium model that explicitly includes a banking sector with a maturity mismatch. We demonstrate that, despite the perfect competition in the banking sector, rational banks take on excessive risks systemically, resulting in overleverage and inefficiently high crisis probabilities. The model accounts for the banks' rational over-optimism regarding future capital prices which arises from pecuniary externalities on their own solvency. Using the model as an example, we introduce MSR (marginal systemic risk) as a general measure to assess the macroeconomic exposure to systemic risks.

Suggested Citation

  • Ryo Kato & Takayuki Tsuruga, 2011. "Bank Overleverage and Macroeconomic Fragility," IMES Discussion Paper Series 11-E-15, Institute for Monetary and Economic Studies, Bank of Japan.
  • Handle: RePEc:ime:imedps:11-e-15

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    References listed on IDEAS

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    10. Ryo Kato & Takayuki Tsuruga, 2011. "The Safer, the Riskier:A Model of Bank Leverage and Financial Instability," Discussion papers e-10-014, Graduate School of Economics Project Center, Kyoto University.
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    Cited by:

    1. Keiichiro Kobayashi & Tomoyuki Nakajima, 2017. "A macroeconomic model of liquidity crises," CIGS Working Paper Series 17-010E, The Canon Institute for Global Studies.
    2. 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.
    3. Keiichiro Kobayashi & Tomoyuki Nakajima, 2014. "A macroeconomic model of liquidity crises," CIGS Working Paper Series 14-003E, The Canon Institute for Global Studies.
    4. Olivier Jeanne & Anton Korinek, 2013. "Macroprudential Regulation Versus Mopping Up After the Crash," NBER Working Papers 18675, National Bureau of Economic Research, Inc.
    5. Kato, Ryo & Tsuruga, Takayuki, 2016. "The safer, the riskier: A model of financial instability and bank leverage," Economic Modelling, Elsevier, vol. 52(PA), pages 71-77.

    More about this item


    Financial crisis; Liquidity shortage; Maturity mismatch; Pecuniary externalities;

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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