Bank Value and Financial Fragility

Karine Gobert, Patrick Gonzalez (pgon@ecn.ulaval.ca) and Michel Poitevin

Cahiers de recherche from Université Laval - Département d'économique

Abstract:

We propose a valuation model for a bank which faces a bankruptcy risk. Banks are identified with a possibly infinite random sequence of net benefits. A bank is solvent as long as its benefits remain non-negative. To preserve distressed banks from destruction, banks will be pooled within a financial coalition. When possible, those with current positive balance sheet will refinance those in need of liquidity. Banks are refinanced to the extent that their current needs for liquidity do not exceed their expected endogenous continuation value. This value itself is affected by future refinancing possibilities. We provide a recursive formula to compute this value when there is an aggregate liquidity constraint.

Keywords: Bankruptcy; Financial fragility (search for similar items in EconPapers)
JEL-codes: D46 G12 G33 (search for similar items in EconPapers)
Date: 2002
New Economics Papers: this item is included in nep-cfn and nep-mfd
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Related works:
Working Paper: Bank Value and Financial Fragility (2002)
Working Paper: Bank Value and Financial Fragility (2002)
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Persistent link: https://EconPapers.repec.org/RePEc:lvl:laeccr:0206

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