Asset Returns and Financial Fragility
Yang Li ()
Departmental Working Papers from Rutgers University, Department of Economics
What configuration of asset returns will make the banking system most susceptible to a self-fulfilling run? I study this question in a version of the model of Diamond and Dybvig (1983) with limited commitment and a non-trivial portfolio choice. I show that the relationship between the returns on banks’ assets and financial fragility is often non-monotone: a higher return may make banks either more or less susceptible to a run by depositors. The same is true for changes in the liquidation cost and the term premium. I derive precise conditions under which changes in each of these returns increase or decrease financial fragility.
Keywords: Financial fragility; Bank runs; Excess liquidity (search for similar items in EconPapers)
JEL-codes: G11 G21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn and nep-fmk
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Journal Article: Interest rates and financial fragility (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:rut:rutres:201601
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