Uncertainty and Investment: The Financial Intermediary Balance Sheet Channel

Author/Editor:

Sophia Chen

Publication Date:

March 20, 2015

Electronic Access:

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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.

Series:

Working Paper No. 2015/065

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

English

Publication Date:

March 20, 2015

ISBN/ISSN:

9781475593167/1018-5941

Stock No:

WPIEA2015065

Pages:

30

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