Bank Overleverage and Macroeconomic Fragility

Ryo Kato and Takayuki Tsuruga

Discussion papers from Graduate School of Economics Project Center, Kyoto University

Abstract: We incorporate the banks, defined as maturity-mismatching financial intermediaries by Diamond and Rajan (2001a, 2012), into an overlapping-generations model where capital good is reproducible. We show that, in our model, the laissez-faire banks take on undue risks, compared to the social optimum, owing to the pecuniary externalities. Further, the model replicates rare but severe crises without assuming any large ex ogenous shocks because systemic bank runs take place endogenously followed by sharp contractions in output. We also make policy assessments based on the model. The assessment favors some macro-prudential measures over pre-committed bank bailouts.

Keywords: Financial crisis; Liquidity shortage; Maturity mismatch; Credit externalities; Financial regulation (search for similar items in EconPapers)
JEL-codes: E3 G01 G21 (search for similar items in EconPapers)
Pages: 60 pages
Date: 2012-04, Revised 2013-03
New Economics Papers: this item is included in nep-ban, nep-cba and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Bank Overleverage and Macroeconomic Fragility (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:kue:dpaper:e-12-002

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