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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

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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
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:
DateEvent
August 2019Published
19 June 2019Available
17 June 2019Accepted
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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