Uncertainty and Investment: The Financial Intermediary Balance Sheet Channel
March 20, 2015
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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
Pages:
30
Volume:
2015
DOI:
Issue:
065
Series:
Working Paper No. 2015/065
Stock No:
WPIEA2015065
ISBN:
9781475593167
ISSN:
1018-5941
