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

Robert Dekle () and Kenneth Kletzer

No 2002-10, Pacific Basin Working Paper Series from Federal Reserve Bank of San Francisco

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.

Date: 2002
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.frbsf.org/wp-content/uploads/pb02-10.pdf Full Text (text/html)

Related works:
Journal Article: Financial intermediation, agency and collateral and the dynamics of banking crises: theory and evidence for the Japanese banking crisis (2002)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedfpb:2002-10

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Pacific Basin Working Paper Series from Federal Reserve Bank of San Francisco Contact information at EDIRC.
Bibliographic data for series maintained by Federal Reserve Bank of San Francisco Research Library ().