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Bank assets, liquidity and credit cycles
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Lubello, Federico, Petrella, Ivan and Santoro, Emiliano (2019) Bank assets, liquidity and credit cycles. Journal of Economic Dynamics and Control, 105 . pp. 265-282. doi:10.1016/j.jedc.2019.06.003
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Official URL: https://doi.org/10.1016/j.jedc.2019.06.003
Abstract
We study how bank collateral assets and their pledgeability affect the amplitude of credit cycles. To this end, we develop a tractable model where bankers intermediate funds between savers and borrowers. If bankers default, savers acquire the right to liquidate bankers’ assets. However, due to the vertically integrated structure of our credit economy, savers anticipate that liquidating financial assets (i.e., loans) is conditional on borrowers being solvent on their debt obligations. This friction limits the collateralization of bankers’ financial assets beyond that of real assets (i.e., capital). In this context, increasing the pledgeability of financial assets eases more credit and reduces the spread between the loan and the deposit rate, thus attenuating capital misallocation as it typically emerges in credit economies à la Kiyotaki and Moore (1997). We uncover a close connection between the collateralization of bank loans, macroeconomic amplification and the degree of procyclicality of bank leverage.
| Item Type: | Journal Article | ||||||||
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| Subjects: | H Social Sciences > HG Finance | ||||||||
| Divisions: | Faculty of Social Sciences > Warwick Business School | ||||||||
| Library of Congress Subject Headings (LCSH): | Banks and banking, Monetary policy, Bank liquidity, Bank management, Security (Law), Asset allocation -- Econometric models, Capital investments | ||||||||
| Journal or Publication Title: | Journal of Economic Dynamics and Control | ||||||||
| Publisher: | Elsevier BV | ||||||||
| ISSN: | 0165-1889 | ||||||||
| Official Date: | August 2019 | ||||||||
| Dates: |
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| Volume: | 105 | ||||||||
| Page Range: | pp. 265-282 | ||||||||
| DOI: | 10.1016/j.jedc.2019.06.003 | ||||||||
| Status: | Peer Reviewed | ||||||||
| Publication Status: | Published | ||||||||
| Access rights to Published version: | Restricted or Subscription Access |
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