 Search for YieldDavid Martinez-Miera and Rafael Repullo Working Papers from CEMFI Abstract: We present a model of the connection between real interest rates, credit spreads, and the structure and the risk of the banking system. Banks intermediate between entrepreneurs and investors, and choose the monitoring intensity on entrepreneurs. projects. We characterize the equilibrium for a fixed aggregate supply of savings, showing that safer entrepreneurs will be funded by nonmonitoring (shadow) Banks and riskier entrepreneurs by monitoring (traditional) banks. We also show that a savings glut reduces interest rates and spreads, increases the relative size of the shadow banking system and the probability of failure of the traditional banks. The model provides a framework for understanding the emergence of endogenous boom and bust cycles, as well as the procyclical nature of the shadow banking system, the existence of countercyclical risk premia, and the low levels of interest rates and spreads leading to the buildup of risks during booms. Keywords: Savings glut; real interest rates; credit spreads; bank monitoring; shadow banks; financial stability; banking crises; boom and bust cycles. (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:cmf:wpaper:wp2015_1507 Access Statistics for this paper More papers in Working Papers from CEMFI Contact information at EDIRC. |
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