Banks, Capital Flows and Financial Crises

Ozge Akinci and Albert Queraltó
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Albert Queraltó: https://www.federalreserve.gov/econres/albert-queralto.htm

No 1121, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: This paper proposes a macroeconomic model with financial intermediaries (banks), in which banks face occasionally binding leverage constraints and may endogenously affect the strength of their balance sheets by issuing new equity. The model can account for occasional financial crises as a result of the nonlinearity induced by the constraint. Banks' precautionary equity issuance makes financial crises infrequent events occurring along with \"regular\" business cycle fluctuations. We show that an episode of capital infl ows and rapid credit expansion, triggered by low country interest rates, leads banks to endogenously decrease the rate of equity issuance, contributing to an increase in the likelihood of a crisis. Macroprudential policies directed at strengthening banks' balance sheets, such as capital requirements, are shown to lower the probability of financial crises and to enhance welfare.

Keywords: Financial intermediation; sudden stops; leverage constraints; occasionally binding constraints (search for similar items in EconPapers)
JEL-codes: E32 F41 F44 G15 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2014-11-07
New Economics Papers: this item is included in nep-ban, nep-dge, nep-mac and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:1121

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