Banks, Capital Flows and Financial Crises
Ozge Akinci () and
Albert Queraltó ()
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Albert Queraltó: Board of Governors of the Federal Reserve System (U.S.), http://www.federalreserve.gov/econresdata/albert-queralto.htm
No 1121, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)
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)
New Economics Papers: this item is included in nep-ban, nep-dge, nep-mac and nep-opm
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