EconPapers    
Economics at your fingertips  
 

Bank Overleverage and Macroeconomic Fragility

Ryo Kato () and Takayuki Tsuruga ()

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

Abstract: 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
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed

Downloads: (external link)
http://www.econ.kyoto-u.ac.jp/projectcenter/Paper/e-12-002.pdf (application/pdf)

Related works:
Working Paper: Bank Overleverage and Macroeconomic Fragility (2011) Downloads
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:kue:dpaper:e-12-002

Access Statistics for this paper

More papers in Discussion papers from Graduate School of Economics Project Center, Kyoto University Contact information at EDIRC.
Bibliographic data for series maintained by Graduate School of Economics Project Center ().

 
Page updated 2020-09-10
Handle: RePEc:kue:dpaper:e-12-002