Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5106521 | Journal of Financial Stability | 2017 | 17 Pages |
Abstract
This paper shows how the debt-overhang distortion on bank lending can generate a self-fulfilling-expectations banking crisis accompanied by a plunge in the value of banks' assets and a contraction of bank lending and economic activity. Moral hazard in banking adds an additional channel that can generate multiple equilibria, worsen the debt-overhang distortion, and deepen the crisis. Some signals of systemic risk include: high volatility and the presence of two modes in the probability distribution functions of the returns on bank-issued bonds and on portfolios of bank-issued bonds and equities; and high correlation between the returns on bank-issued bonds. Macroprudential regulation should discourage the exposure of banks to the economic and financial cycle by raising the capital requirements for banks with more cyclical assets.
Keywords
Related Topics
Social Sciences and Humanities
Economics, Econometrics and Finance
Economics, Econometrics and Finance (General)
Authors
Filippo Occhino,