Bank Overleverage and Macroeconomic Fragility

Ryo Kato and Takayuki Tsuruga

No 11-E-15, IMES Discussion Paper Series from Institute for Monetary and Economic Studies, Bank of Japan

Abstract: This paper develops a dynamic general equilibrium model that explicitly includes a banking sector with a maturity mismatch. We demonstrate that, despite the perfect competition in the banking sector, rational banks take on excessive risks systemically, resulting in overleverage and inefficiently high crisis probabilities. The model accounts for the banks' rational over-optimism regarding future capital prices which arises from pecuniary externalities on their own solvency. Using the model as an example, we introduce MSR (marginal systemic risk) as a general measure to assess the macroeconomic exposure to systemic risks.

Keywords: Financial crisis; Liquidity shortage; Maturity mismatch; Pecuniary externalities (search for similar items in EconPapers)
JEL-codes: E3 G01 G21 (search for similar items in EconPapers)
Date: 2011-07
New Economics Papers: this item is included in nep-ban, nep-bec, nep-cba, nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Working Paper: Bank Overleverage and Macroeconomic Fragility (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:ime:imedps:11-e-15

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