Financial Crisis Resolution
Staff Working Papers from Bank of Canada
This paper studies a dynamic version of the Holmstrom-Tirole model of intermediated finance. I show that competitive equilibria are not constrained efficient when the economy experiences a financial crisis. A pecuniary externality entails that banks’ desire to accumulate capital over time aggravates the scarcity of informed capital during the financial crisis. 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.
Keywords: Financial markets; Financial system regulation and policies (search for similar items in EconPapers)
JEL-codes: D53 E60 G01 G10 G18 (search for similar items in EconPapers)
Pages: 25 pages
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Working Paper: Financial Crisis Resolution (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:12-42
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