Uncertainty and Investment: The Financial Intermediary Balance Sheet Channel

March 20, 2015

Preview Citation

Format: Chicago

Sophia Chen. Uncertainty and Investment: The Financial Intermediary Balance Sheet Channel, (USA: International Monetary Fund, 2015) accessed September 19, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Rollover risk imposes market discipline on banks’ risk-taking behavior but it can be socially costly. I present a two-sided model in which a bank simultaneously lends to a firm and borrows from the short-term funding market. When the bank is capital constrained, uncertainty in asset quality and rollover risk create a negative externality that spills over to the real economy by ex ante credit contraction. Macroprudential and monetary policies can be used to reduce the social cost of market discipline and improve efficiency.

Subject: Asset and liability management, Asset valuation, Banking, Credit, Financial institutions, Financial regulation and supervision, Financial statements, Liquidity requirements, Money, Public financial management (PFM), Stocks

Keywords: Asset portfolio, Asset quality, Asset valuation, Balance sheet, Bank financing, Bank-creditor contract, Capital structure, Credit, Credit supply, Debt value, Financial statements, Incentive compatibility constraint, Liquidity needs, Liquidity requirements, Long-term debt, Portfolio consist, Representative bank, Short-term debt, Stocks, Uncertainty, Underinvestment, WP

Publication Details

Pages:

30
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2015/065
Stock No:

WPIEA2015065
ISBN:

9781475593167
ISSN:

1018-5941

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