Autore: Schroth, Josef
Titolo: Financial Crisis Resolution
Periodico: European University Institute of Badia Fiesolana (Fi). Department of Economics - Working papers
Anno: 2012 - Fascicolo: 14 - Pagina iniziale: 1 - Pagina finale: 21

This paper studies a dynamic version of the Holmstrom-Tirole model of intermediated finance. I show that competitive equilibria are not constrained efficient when the economy experiences a financial crises. A pecuniary externality entails that bank back-loading of dividend payments may weaken bank incentives. Banks’ strong desire to accumulate capital over time aggravates the scarcity of informed capital during the financial crisis. I show that a constrained social planner finds it beneficial to introduce a permanent wedge between the deposit rate and the economy’s marginal rate of transformation. The wedge improves borrowers’ access to finance during a financial crisis by strengthening banks’ incentives to provide intermediation services. I propose a simple implementation of the constrained-efficient allocation that limits bank size.


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