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Financial Crisis Resolution

  • Josef Schroth


This paper studies a dynamic version of the Holmstrom-Tirole model of intermediated finance. I show that competitive equilibria are inefficient when the economy experiences a financial crises. A pecuniary externality entails that bank back-loading may weaken bank incentives. I show that a constrained social planner finds it beneficial to introduce a permanent wedge between the deposit rate and the economy's marginal rate of transformation. The wedge improves borrowers' access to finance during a financial crisis by strengthening banks' incentives to provide intermediation services. I propose a simple implementation of the constrained-efficient allocation that limits bank size.

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Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 617.

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Date of creation: 2012
Date of revision:
Handle: RePEc:red:sed012:617
Contact details of provider: Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA
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  2. Takeo Hoshi & Anil K Kashyap, 2008. "Will the U.S. Bank Recapitalization Succeed? Eight Lessons from Japan," NBER Working Papers 14401, National Bureau of Economic Research, Inc.
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  12. Timothy J. Kehoe & David K. Levine, 1992. "Debt constrained asset markets," Working Papers 445, Federal Reserve Bank of Minneapolis.
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  17. Abraham, Arpad & Carceles-Poveda, Eva, 2006. "Endogenous incomplete markets, enforcement constraints, and intermediation," Theoretical Economics, Econometric Society, vol. 1(4), pages 439-459, December.
  18. Keeley, Michael C, 1990. "Deposit Insurance, Risk, and Market Power in Banking," American Economic Review, American Economic Association, vol. 80(5), pages 1183-1200, December.
  19. Chevalier, Judith A, 1995. " Do LBO Supermarkets Charge More? An Empirical Analysis of the Effects of LBOs on Supermarket Pricing," Journal of Finance, American Finance Association, vol. 50(4), pages 1095-1112, September.
  20. Adriano A. Rampini & S. Viswanathan, 2010. "Collateral, Risk Management, and the Distribution of Debt Capacity," Journal of Finance, American Finance Association, vol. 65(6), pages 2293-2322, December.
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