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Bank fragility and growth expectations

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Proto, Eugenio. (2007) Bank fragility and growth expectations. BE Journal of Economic Analysis & Policy, Vol.7 (No.1). Article 55. ISSN 1935-1682

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Official URL: http://dx.doi.org/10.2202/1935-1682.1720

Abstract

Banks supply liquidity to insure individuals against possible short-term consumption shocks. The higher this level of illiquidity insurance the lower the investments in long run assets, and the higher the risk of a bank run generated by a real negative shock. If individuals are sufficiently risk averse, competitive banks trade off liquidity insurance for portfolio risk. High growth expectations, typical of emerging economies, increase the optimal liquidity supply even when this increases the risk of a bank run. On the contrary, deposit contracts offered when economic performances are very uncertain (like in less developed economies), and where output fluctuations are milder (like in developed economies), are less exposed to the risk of a bank run. In this setting, a bail-out in case of crisis is ex-ante Pareto efficient even if it always increases the risk of crisis.

Item Type:	Journal Article
Subjects:	H Social Sciences > HG Finance
Divisions:	Faculty of Social Sciences > Economics
Library of Congress Subject Headings (LCSH):	Banks and banking, International, Development economics, Risk, Rational expectations (Economic theory), Bank insurance
Journal or Publication Title:	BE Journal of Economic Analysis & Policy
Publisher:	Berkeley Electronic Press
ISSN:	1935-1682
Date:	5 November 2007
Volume:	Vol.7
Number:	No.1
Page Range:	Article 55
Identification Number:	10.2202/1935-1682.1720
Status:	Peer Reviewed
Access rights to Published version:	Open Access
Funder:	Suomen Pankki. Siirtymätalouksien tutkimuslaitos [Bank of Finland Institute for Economies in Transition] (SPST)
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URI:	http://wrap.warwick.ac.uk/id/eprint/884