Financial Risk Capacity
Saki Bigio and
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Adrien d'Avernas: Stockholm School of Economics
No 511, 2019 Meeting Papers from Society for Economic Dynamics
Financial crises seem particularly severe and lengthy when banks fail to re- capitalize after bearing large losses. We present a model that explains the slow recovery of bank capital and economic activity. Banks provide intermediation in markets with informational asymmetries. Large equity losses force banks to reduce intermediation, which exacerbates adverse selection. Adverse selection lowers profit margins for banks, which lowers banks profits and incentives to recapitalize. The model delivers financial crises characterized by persistent low economic growth.
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Working Paper: Financial Risk Capacity (2019)
Working Paper: Financial Risk Capacity (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed019:511
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