Misdiagnosing Bank Capital Problems

Jeremy Bulow and Paul Klemperer
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Jeremy Bulow: Stanford University

Research Papers from Stanford University, Graduate School of Business

Abstract: Banks' reluctance to repair their balance sheets, combined with deposit insurance and regulatory forbearance in recognizing greater risks and losses, can lead to solvency problems that look like liquidity (bank-run) crises. Regulatory forbearance incentivizes banks to both retain risky loans and reject new good opportunities. With suffcient regulatory forbearance, partially-insured banks act exactly as if they are fully insured. Stress tests certify that uninsured creditors will be paid, not solvency, and have ambiguous effects on the efficiency of investment.

JEL-codes: G10 G21 G28 G32 (search for similar items in EconPapers)
Date: 2021-08
New Economics Papers: this item is included in nep-fdg, nep-ias and nep-ore
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https://www.gsb.stanford.edu/faculty-research/work ... ank-capital-problems

Related works:
Working Paper: Misdiagnosing Bank Capital Problems (2021)
Working Paper: Misdiagnosing Bank Capital Problems (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:ecl:stabus:3983

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