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Financial Risk Capacity

Saki Bigio and Adrien d'Avernas
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Adrien d'Avernas: Stockholm School of Economics

No 511, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: 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.

Date: 2019
New Economics Papers: this item is included in nep-ban, nep-fdg and nep-rmg
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https://economicdynamics.org/meetpapers/2019/paper_511.pdf (application/pdf)

Related works:
Working Paper: Financial Risk Capacity (2019) Downloads
Working Paper: Financial Risk Capacity (2014) Downloads
Working Paper: Financial Risk Capacity (2012) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed019:511

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