Bank Overleverage and Macroeconomic Fragility
Ryo Kato () and
Takayuki Tsuruga ()
Discussion papers from Graduate School of Economics Project Center, Kyoto University
This paper develops a dynamic general equilibrium model that explicitly includes a banking sector engaged in a maturity mismatch. We demonstrate that rational competitive banks take on excessive risks systemically, resulting in overleverage and ine¢ ciently high crisis probabilities. The model accounts for the banks seemingly over-optimistic outlook about their own solvency and the asset prices, compared to the social optimum. The result calls for policy intervention to reduce the high crisis probabilities. To this end, the government can commit to bailing out banks through public supply of liquidity or a low-interest rate policy. As opposed to the intention of the government, however, expectations of a bailout could incentivize banks to be even more overleveraged, leaving the economy exposed to higher crisis probabilities.
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
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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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