EconPapers    
Economics at your fingertips  
 

Banks, Capital Flows and Financial Crises

Ozge Akinci () and Albert Queraltó ()
Additional contact information
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.)

Abstract: 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
Date: 2014-11-07
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9) Track citations by RSS feed

Downloads: (external link)
http://www.federalreserve.gov/econresdata/ifdp/2014/files/ifdp1121.pdf Full text (application/pdf)

Related works:
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:fedgif:1121

Ordering information: This working paper can be ordered from
http://www.federalreserve.gov/pubs/ifdp/order.htm

Access Statistics for this paper

More papers in International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.) Contact information at EDIRC.
Bibliographic data for series maintained by Ryan Wolfslayer ().

 
Page updated 2019-04-11
Handle: RePEc:fip:fedgif:1121