Unstable banking

Andrei Shleifer and Robert Vishny

Journal of Financial Economics, 2010, vol. 97, issue 3, 306-318

Abstract: We propose a theory of financial intermediaries operating in markets influenced by investor sentiment. In our model, banks make, securitize, distribute, and trade loans, or they hold cash. They also borrow money, using their security holdings as collateral. Banks maximize profits, and there are no conflicts of interest between bank shareholders and creditors. The theory predicts that bank credit and real investment will be volatile when market prices of loans are volatile, but it also points to the instability of banks, especially leveraged banks, participating in markets. Profit-maximizing behavior by banks creates systemic risk.

Keywords: Securitization; Credit; Fire; sales; Systemic; risk (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (146)

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Working Paper: Unstable banking (2010)
Working Paper: Unstable Banking (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:97:y:2010:i:3:p:306-318

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