New Economics Papers
on Banking
Issue of 2007‒01‒13
25 papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. Banking services for everyone ? Barriers to bank access and use around the world By Beck, Thorsten; Demirguc-Kunt, Asli; Martinez Peria, Maria Soledad
  2. Banking Policy without Commitment: Suspension of Convertibility Taken Seriously By Huberto M. Ennis; Todd Keister
  3. A Model of Interbank Settlement By Benjamin Lester
  4. A model of banknote discounts By Laurence Ales; Francesca Carapella; Pricila Maziero; Warren Weber
  5. A Model of Money and Credit, with Application to the Credit Card Debt Puzzle By Irina A. Telyukova; Randall Wright
  6. The Bank Capital Channel of Monetary Policy By Skander Van den Heuvel
  7. "Role of Inter-bank Networks in the Pre-war Japanese Financial System"(in Japanese) By Tetsuji Okazaki; Michiru Sawada
  8. "The Role of Trade Credit for Small Firms: An Implication from Japan's Banking Crisis" By Shin-ichi Fukuda; Munehisa Kasuya; Kentaro Akashi
  9. "Lender of Last Resort and Selection of Banks in Pre-war Japan"(in Japanese) By Tetsuji Okazaki
  10. "Rethinking '100% Money': Challenges from New Financial Technology"(in Japanese) By Nai-fu Chen; Takao Kobayashi; Risa Sai
  11. Does Patience Pay? Empirical Testing of the Option to Delay Accepting a Tender Offer in the U.S. Banking Sector By Rachel A. Campbell; Roman Kräussl
  12. Tying Lending and Underwriting: Scope Economies, Incentives, and Reputation By Christian Laux; Uwe Walz
  13. Current challenges in financial regulation By Claessens, Stijn
  14. Default Rates in the Loan Market for SMEs:: Default Rates in the Loan Market for SMEs: Evidence from Slovakia By Fidrmuc, Jarko; Hainz, Christa; Malesich, Anton
  15. Determinants and Effects of Maturity Mismatches in Emerging Markets: Evidence from Bank Level Data By Uluc Aysun
  16. Comparing Financial Systems: A structural Analysis By Sylvain Champonnois
  17. Testing for Balance Sheet Effects in Emerging Market Countries By Uluc Aysun
  18. "The Critical Weakness of the Japanese Financial System and Its Remedy "(in Japanese) By Takao Kobayashi
  19. Evaluating Value-at-Risk models with desk-level data By Jeremy Berkowitz; Peter Christoffersen; Denis Pelletier
  20. "Personnel Management in a City Bank in Prewar Japan: A Case of Mitsui Bank, 1897-1943"(in Japanese) By Makoto Kasuya
  21. 1840-1870 : de nouvelles institutions bancaires By Pierre-Cyrille Hautcoeur
  22. Diversité et décentralisation des institutions du système financier français, 1800-1840 By Pierre-Cyrille Hautcoeur
  23. Credit Market and Macroeconomic Volatility By Caterina Mendicino
  24. Bubbles and Self-fulfilling Crises By Edouard Challe; Xavier Ragot
  25. Subprime and Predatory Mortgage Refinancing: Information Technology, Credit Scoring, and Vulnerable Borrowers By Dennis Gale

  1. By: Beck, Thorsten; Demirguc-Kunt, Asli; Martinez Peria, Maria Soledad
    Abstract: Using information from 193 banks in 58 countries, the authors develop and analyze indicators of physical access, affordability, and eligibility barriers to deposit, loan, and payment services. They find substantial cross-country variation in barriers to banking and show that in many countries these barriers can potentially exclude a significant share of the population from using banking services. Correlations with bank- and country-level variables show that bank size and the availability of physical infrastructure are the most robust predictors of barriers. Further, the authors find evidence that in more competitive, open, and transparent economies, and in countries with better contractual and informational frameworks, banks impose lower barriers. Finally, though foreign banks seem to charge higher fees than other banks, in foreign dominated banking systems fees are lower and it is easier to open bank accounts and to apply for loans. On the other hand, in systems that are predominantly government-owned, customers pay lower fees but also face greater restrictions in terms of where to apply for loans and how long it takes to have applications processed. These findings have important implications for policy reforms to broaden access.
    Keywords: Banks & Banking Reform,Financial Intermediation,Economic Theory & Research,Financial Crisis Management & Restructuring,Competitiveness and Competition Policy
    Date: 2006–12–01
  2. By: Huberto M. Ennis (Research Department Federal Reserve Bank of Richmond); Todd Keister
    Abstract: We study banking policy credibility in a variant of the Diamond and Dybvig (JPE, 1983) model. By committing to temporarily close banks during a run, suspending the convertibility of deposits into currency, the banking authority can eliminate the possibility of a bank run as an equilibrium outcome. Without commitment, however, if a run were to actually occur it may not be optimal for the authority to keep its promise to suspend convertibility. In other words, the threat of suspension may not be credible. We derive conditions under which a credible suspension scheme can be used to rule out bank runs and conditions under which it cannot. In the latter case, bank runs can occur even when there is no uncertainty about aggregate liquidity demand. We relate the analysis to events in Argentina in 2001, when a system-wide suspension of convertibility was declared but only partially enforced
    Keywords: Optimal Policy, Credibility, Time Consistency, Bank Runs
    JEL: G21 G28 L5
    Date: 2006–12–03
  3. By: Benjamin Lester (Department of Economics University of Pennsylvania)
    Abstract: A settlement system is a set of rules and procedures that govern when and how funds are transferred between banks. Perhaps the most crucial feature of a settlement system is the frequency with which settlement occurs. On the one hand, a higher frequency of settlement limits the risk of default should a bank be rendered insolvent. On the other hand, a lower frequency of settlement is less costly for banks to operate. We construct a model of the banking sector in which this trade-off between cost and risk arises endogenously. We then complete the economy with a trading sector that has a micro-founded role for credit as a media of exchange. The result is a general equilibrium model that allows for welfare and policy analysis. We parameterize the economy and study the optimal intra-day borrowing policy that the operator of a settlement system should impose on member banks. We also determine conditions under which one settlement system is more appropriate than another
    Keywords: Payment Systems, Banking, Liquidity
    JEL: E40 E50
    Date: 2006–12–03
  4. By: Laurence Ales (Economics University of Minnesota); Francesca Carapella; Pricila Maziero; Warren Weber
    Abstract: Prior to 1863, state chartered banks in the United States issued notes -- dollar-denominated promises to pay specie to the bearer on demand. Although these notes circulated at par locally, they usually were quoted at the discount outside the local area. These discounts varied by both the location of the bank and the location where the discount was being quoted. Further, these discounts were asymmetric across locations in the sense that the discounts quoted in location A on the notes of banks in location B generally differed from the discounts quoted in location B on the notes of banks in location A. Also, discounts generally increased when banks suspended payments on their notes. In this paper we construct a random matching model to qualitatively match these facts about banknote discounts. To attempt to account for locational differences the model has agents that come from two distinct locations. Each locations also has bankers that can issue notes. Banknotes are accepted in exchange because banks are required to produce when a banknote is presented for redemption and their past actions are public information. The overall performance of the model is quite good. Overall the model delivers predictions consistent with the behavior of discounts
    Keywords: banks, random matching, banknotes
    JEL: G21 N21 E50
    Date: 2006–12–03
  5. By: Irina A. Telyukova; Randall Wright
    Abstract: Many individuals simultaneously have significant credit card debt and money in the bank. The so-called credit card debt puzzle is, given high interest rates on credit cards and low interest rates on bank accounts, why not pay down this debt? Economists have gone to some lengths to explain this. As an alternative, we present a natural extension of the standard model in monetary economics to incorporate consumer debt, which we think is interesting in its own right, and which shows that the coexistence of debt and money in the bank is no puzzle
    Keywords: Money, credit, monetary search models, credit card debt puzzle
    JEL: E44 E51
    Date: 2006–12–03
  6. By: Skander Van den Heuvel (Finance Department University of Pennsylvania)
    Abstract: This paper examines the role of bank lending in the transmission of monetary policy in the presence of capital adequacy regulations. I develop a dynamic model of bank asset and liability management that incorporates risk-based capital requirements and an imperfect market for bank equity. These conditions imply a failure of the Modigliani-Miller theorem for the bank: its lending will depend on the bank’s financial structure, as well as on lending opportunities and market interest rates. Combined with a maturity mismatch on the bank’s balance sheet, this gives rise to a ‘bank capital channel’ by which monetary policy affects bank lending through its impact on bank equity capital. This mechanism does not rely on any particular role of bank reserves and thus falls outside the conventional ‘bank lending channel’. I analyze the dynamics of the new channel. An important result is that monetary policy effects on bank lending depend on the capital adequacy of the banking sector; lending by banks with low capital has a delayed and then amplified reaction to interest rate shocks, relative to well-capitalized banks. Other implications are that bank capital affects lending even when the regulatory constraint is not momentarily binding, and that shocks to bank profits, such as loan defaults, can have a persistent impact on lending
    Keywords: Monetary Policy, Bank Capital, Capital Requirements, Bank Lending Channel
    JEL: E44 E52 G28
    Date: 2006–12–03
  7. By: Tetsuji Okazaki (Faculty of Economics, University of Tokyo); Michiru Sawada (Faculty of Eoconomics, Nagoya-Gakuin University)
    Abstract: In this paper we identify networks among banks in pre-war Japan based on director interlocking data, and explore their implications. It was found that nearly 60% of banks had interlocking ties with at least one other bank. The large regional banks tended to have many interlocking ties. One of the effects of the inter-bank networks was reducing the probability of bank failure. This result is consistent with the descriptive evidences that banks supported a bank in the same network through supplying liquidity, in case it was faced with liquidity shortage. At the same time, a bank tended to choose a bank in the same network as a counterpart of consolidation, which suggests that inter-bank networks lowered the coordination cost of consolidation.
    Date: 2006–03
  8. By: Shin-ichi Fukuda (Faculty of Economics, University of Tokyo); Munehisa Kasuya (Research and Statistics Department, Bank of Japan); Kentaro Akashi (Graduate School of Public Policy, University of Tokyo)
    Abstract: Trade credit is one of the most important sources of short-term external finance for small firms. Previous literature has focused mainly on the substitution of bank loans for trade credit during monetary tightening among many firms, but in this paper we investigate the role of trade credit during the banking crisis in Japan. The basic motivation is to explore whether the substitution hypothesis still holds even under serious financial turbulence. Our main results suggest that the substitution hypothesis held in Japan when the banking sector was healthy, but broke down during the banking crisis. More precisely, both bank loans and trade credit contracted simultaneously during the crisis. Deteriorated bank health might have been primarily responsible for the widespread declines of credit to small and medium size firms in Japan during the banking crisis.
    Date: 2006–10
  9. By: Tetsuji Okazaki (Faculty of Economics, University of Tokyo)
    Abstract: The central bank as the Lender of Last Resort (LLR) is faced with a trade off between the stability of the financial system and the moral hazard of banks. In this paper we explore how this trade off was dealt with by the Bank of Japan (BOJ) in the pre-war period, and how LLR lending by the BOJ affected the financial system. In providing an LLR loan, the BOJ adopted the policy of favoring banks which already had a transaction relationship with the BOJ. Meanwhile, the BOJ was selective in having transaction relationship with banks, and it ceased the relationship, in case the performance of a transaction counterpart declined. The analysis of the bank exits data suggests that the BOJ could successfully bail out illiquid but solvent banks, and thereby avoided the moral hazard that the LLR policy might otherwise have incurred.
    Date: 2006–01
  10. By: Nai-fu Chen (the Paul Merage School of Business, University of California, Irvine, and Center for Advanced Research in Finance, University of Tokyo(Visisting Professor)); Takao Kobayashi (Faculty of Economics, University of Tokyo); Risa Sai (Graduate School of Economics, University of Tokyo)
    Abstract: Although bank loans themselves are illiquid because of inside information, most of their cashflows are not. Recent financial innovations allow most bank loans to be liquefied via credit derivatives and actual and synthetic securitizations. The loan originating-monitoring bank holds the remaining illiquid residual tranche that contains the concentrated credit risk and information rent. We find that in securitizing a representative commercial loan portfolio, the average residual tranche is about 3%, which is the "market determined capital" necessary to support the liquefaction. These innovations turn risky bank loans into liquid securities to be funded by institutional investors and non-guaranteed deposits. If we also restrict transaction accounts with access to the payment system to be backed by 100% reserve, the banking system is perfectly safe without sacrificing a bank's traditional financial intermediary role. The idea of "100% money", which is known to be advocated by Irvine Fisher in 1930's, is now revived with the challenge from new financial technologies. The new system is clearly superior to the current disaster-prone convoluted fractional reserve banking system with deposit insurance and moral hazard.
  11. By: Rachel A. Campbell (Maastricht University); Roman Kräussl (Free University of Amsterdam and CFS)
    Abstract: We examine the empirical predictions of a real option-pricing model using a large sample of data on mergers and acquisitions in the U.S. banking sector. We provide estimates for the option value that the target bank has in waiting for a higher bid instead of accepting an initial tender offer. We find empirical support for a model that estimates the value of an option to wait in accepting an initial tender offer. Market prices reflect a premium for the option to wait to accept an offer that has a mean value of almost 12.5% for a sample of 424 mergers and acquisitions between 1997 and 2005 in the U.S. banking industry. Regression analysis reveals that the option price is related to both the price to book market and the free cash flow of target banks. We conclude that it is certainly in the shareholders best interest if subsequent offers are awaited.
    Keywords: Option-pricing Model, Mergers and Acquisitions, U.S. Banking Industry
    JEL: G34 C10
    Date: 2006–12–21
  12. By: Christian Laux (Frankfurt University and CFS); Uwe Walz (Frankfurt University and CFS)
    Abstract: Informational economies of scope between lending and underwriting are a mixed blessing for universal banks. While they can reduce the cost of raising capital for a firm, they also reduce incentives in the underwriting business. We show that tying lending and underwriting helps to overcome this dilemma. First, risky debt in tied deals works as a bond to increase underwriting incentives. Second, with limitations on contracting, tying reduces the underwriting rents as the additional incentives from debt can substitute for monetary incentives. In addition, reducing the yield on the tied debt is a means to pay for the rent in the underwriting business and to transfer informational benefits to the client. Thus, tying is a double edged sword for universal banks. It helps to compete against specialized investment banks, but it can reduce the rent to be earned in investment banking when universal banks compete against each other. We derive several empirical predictions regarding the characteristics of tied deals.
    Keywords: Tying, Investment Banking, Universal Banking
    JEL: G21 G24 D49
    Date: 2006–12–07
  13. By: Claessens, Stijn
    Abstract: Financial intermediation and financial services industries have undergone many changes in the past two decades due to deregulation, globalization, and technological advances. The framework for regulating finance has seen many changes as well, with approaches adapting to new issues arising in specific groups of countries or globally. The objectives of this paper are twofold: to review current international thinking on what regulatory framework is needed to develop a financial sector that is stable, yet efficient, and provides proper access to households and firms; and to review the key experiences regarding international financial architecture initiatives, with a special focus on issues arising for developing countries. The paper outlines a number of areas of current debate: the special role of banks, competition policy, consumer protection, harmonization of rules-across products, within markets, and globally-and the adaptation and legitimacy of international standards to the circumstances facing developing countries. It concludes with some areas where more research would be useful.
    Keywords: Banks & Banking Reform,Financial Intermediation,Non Bank Financial Institutions,Economic Theory & Research,ICT Policy and Strategies
    Date: 2006–12–01
  14. By: Fidrmuc, Jarko; Hainz, Christa; Malesich, Anton
    Abstract: Banks entering an emerging market face a lot of uncertainty about the risks involved in lending. We use a unique unbalanced panel of nearly 700 short-term loans made to SMEs in Slovakia between January 2000 and June 2005. Of the loans granted, on average 6.0 per cent of the firms defaulted. Several probit models and panel probit models show that liquidity and profitability factors are important determinants of SMEs defaults, while debt factors are less robust. However, we find that above average indebtedness significantly increases the probability of default. Moreover, the legal form that determines liability has important incentive effects.
    Keywords: SME; Credit; Loan Default; Mortality Rates; Incentives; Probit; Panel Data
    JEL: G33 G21 C25
    Date: 2007–01
  15. By: Uluc Aysun (University of Connecticut)
    Abstract: Despite the extensive work on currency mismatches, research on the determinants and effects of maturity mismatches is scarce. In this paper I show that emerging market banks. maturity mismatches are negatively affected by capital inflows and price volatilities. Furthermore, I find that banks with low maturity mismatches are more profitable during crisis periods but less profitable otherwise. The later result implies that banks face a tradeoff between higher returns and risk, hence channeling short term capital into long term loans is caused by cronyism and implicit guarantees rather than the depth of the financial market. The positive relationship between maturity mismatches and price volatility, on the other hand, shows that the banks of countries with high exchange rate and interest rate volatilities can not, or choose not to hedge themselves. These results follow from a panel regression on a data set I constructed by merging bank level data with aggregate data. This is advantageous over traditional studies which focus only on aggregate data.
    Keywords: mergentonline, bank level data, maturity mismatches, liquidity, profitability and debt structure ratios, price volatility.
    JEL: E44 F32 F34 F41
    Date: 2006–08
  16. By: Sylvain Champonnois (Economics Princeton University)
    Abstract: This paper investigates whether the financial markets are relatively more efficient than banks in the UK than in continental Europe. The UK channels a larger fraction of the financial flow to the firms through financial markets than continental Europe but this is explained by larger firms in the UK, not relatively more efficient markets. This conclusion is drawn from an industry-level structural estimation using data on the UK, France, Germany and Italy. The structural model is based on a novel theory of capital allocation and investment in which the decisions of heterogenous firms across financing instruments are aggregated in closed-form
    Keywords: Financial structure, bank finance, market finance, heterogenous firms, structural estimation,
    JEL: C51 E44 G31
    Date: 2006–12–03
  17. By: Uluc Aysun (University of Connecticut)
    Abstract: This paper tests the presence of balance sheets effects and analyzes the implications for exchange rate policies in emerging markets. The results reveal that the emerging market bond index (EMBI) is negatively related to the banks. foreign currency leverage, and that these banks. foreign currency exposures are relatively unhedged. Panel SVAR methods using EMBI instead of advanced country lending rates find, contrary to the literature, that the amplitude of output responses to foreign interest rate shocks are smaller under relatively fixed regimes. The findings are robust to the local projections method of obtaining impulse responses, using country specific and GARCH-SVAR models.
    Keywords: EMBI, bank balance sheets, leverage, country risk premium, exchange rates.
    JEL: E44 F31 F41
    Date: 2006–08
  18. By: Takao Kobayashi (Faculty of Economics, University of Tokyo)
    Abstract: This is a short essay motivated by the author's concern about the creation of a new series of lumpy credit risk exposures entering Japanese bank portfolios, in particular through recent comeback of real estate transactions. The essay will be printed in "Keizai Kyousitsu" of the Nikkei Morning Newspaper, October 11, 2006.
    Date: 2006–10
  19. By: Jeremy Berkowitz (University of Houston); Peter Christoffersen (McGill University); Denis Pelletier (Department of Economics, North Carolina State University)
    Abstract: We present new evidence on disaggregated profit and loss and VaR forecasts obtained from a large international commercial bank. Our dataset includes daily P/L generated by four separate business lines within the bank. All four business lines are involved in securities trading and each is observed daily for a period of at least two years. Given this rich dataset, we provide an integrated, unifying framework for assessing the accuracy of VaR forecasts. A thorough Monte Carlo comparison of the various methods is conducted to provide guidance as to which of these many tests have the best finite-sample size and power properties. The Caviar test of Engle and Manganelli (2004) performs best overall but duration-based tests also perform well in many cases.
    Keywords: risk management, backtesting, volatility, disclosure
    JEL: G21 G32
    Date: 2005–10
  20. By: Makoto Kasuya (Faculty of Economics, University of Tokyo)
    Abstract: This paper aims to analyze personnel management of Mitsui Bank, which was one of the largest banks in prewar Japan, from 1897 to 1943. Around 1900 it began to hire only new school leavers, although it hired many people in mid-career in the 19th century. As a result vacant positions came to be filled by employees under such positions. It took three kinds of people into employment: people with higher education, people with secondary education, and people with primary education. People, who received higher education, were mainly allocated to sections such as loan, screening, and foreign business and promoted to sub-manager and/or managers. People with secondary education were hired as probationers (minarai-in) and qualified as full-fledged employees in two or three years. People with only primary education were hired as trainees (renshusei) by a branch manager and qualified as probationers in three or four years. People with primary or secondary education were allocated to sections such as calculation and teller and promoted to section heads of a branch. Deposit section was filled by all three kinds of employees. Most employees, who stayed at the bank for more than twenty years, experienced three or four sections, though employees in foreign business section experienced fewer sections. When two branches were closed in 1933, fifty-six employees, of which number was nearly equal to the number of employees in the closed branches, were placed on a reserve list. Employees on the list were consisted of kinds of employees: employees, who had been with the bank for twenty-five or more years and had right to receive pension fund and employees, who had been ill and absent for a long time. The bank intended to decrease a surplus in personnel rapidly, but discharged people whose income were assured by the bank or people, who could not work on equal terms with others. This policy seemed to encourage employees to invest in firm-specific skills.
    Date: 2006–03
  21. By: Pierre-Cyrille Hautcoeur
    Abstract: Ce papier constitue le septième chapitre de l'"Histoire du marché financier français au 19e siècle" (à paraître en janvier 2007, publications de la Sorbonne). Dans ce chapitre, nous étudions les transformations profondes qui touchent le système bancaire au milieu du 19e siècle et nous nous interrogeons sur leur caractère substituable ou complémentaire avec le développement du marché des titres. Nous concluons en faveur de la deuxième hypothèse. ### [english abstract: This paper is the seventh chapter of a book forthcoming in January 2007 under the title "Histoire du marché financier français au 19e siècle" (a history of the French capital market in the 19th century). He describes and explains the profound changes undertaken by the banking industry around the mid of the 19th century, and discusses whether they represented an alternative or a complement to the rise of the securities market; it concludes in favour of the second interpretation.] ###
    Date: 2006
  22. By: Pierre-Cyrille Hautcoeur
    Abstract: Ce papier constitue le premier chapitre de l'"Histoire du marché financier français au 19e siècle" (à paraître en janvier 2007, publications de la Sorbonne). Dans ce chapitre, nous cherchons à montrer la diversité des éléments constituant le système financier au début du XIXe siècle et à comprendre la transition qui s'effectue avec celui du XVIIIe siècle, puis nous tentons de décrire et de comprendre l'évolution de ces éléments jusqu'aux années 1840. Ce chapitre est consacré aux trois types d'institutions qui dominent alors le marché des capitaux à long terme en dehors de la Bourse de valeur (à laquelle sera consacré le chapitre 2) : les banques, les notaires et le circuit du Trésor. ### [english abstract: This paper is the first chapter of a book forthcoming in January 2007 under the title "Histoire du marché financier français au 19e siècle" (a history of the French capital market in the 19th century). He presents broadly the various main elements constituting the long term capital markets, excepting the stock-exchange (which is studied in the next chapter): the banks, the notaries and the network of the Treasury correspondents. We present the transition between the 18th and the 19th centuries and the main changes in the capital markets until the 1840s.] ###
    Date: 2006
  23. By: Caterina Mendicino (Department of Economics Stockholm School of Economics)
    Abstract: This paper investigate how the degree of credit market development is related to business cycle fluctuations in industrialized countries. I show that a business cycle model with collateral constraints generate a negative relation between the volatility of the cyclical component of output and the size of the credit market. I dentify the reallocation of capital as the key element in shaping out this relation. According to the model, more credit to the private sector makes output less sensitive to productivity shocks. Thus, the amplification role of credit frictions in the propagation of productivity shocks to output is greater in economies with higher degrees of credit rationing. I confront the prediction of the model with a panel of OECD countries over the last 20 years. Empirical evidence confirms that countries with a more developed credit market experience smoother fluctuations. Moreover, a greater size of the credit market dampens the propagation of productivity shocks to output and investment
    Keywords: collateral constraint, reallocation of capital, asset prices
    JEL: E21 E22 E44
    Date: 2006–12–03
  24. By: Edouard Challe (CNRS-CEREG public); Xavier Ragot
    Abstract: Financial crises are often associated with an endogenous credit reversal followed by a fall in asset prices and serious disruptions in the financial sector. To account for this sequence of events, this paper constructs a model where the excessive risk-taking of portfolio investors leads to a bubble in asset prices (in the spirit of Allen and Gale, 'Bubbles and Crises', Economic Journal, 2000), and where the supply of credit to these investors is endogenous. We show that the interplay between the risk shifting problem and the endogeneity of credit may give rise multiple equilibria associated with di¤erent levels of lending, asset prices, and output. Stochastic equilibria lead, with positive probability, to an ine¢ cient liquidity dry-up at the intermediate date, a market crash, and widespread failures of borrowers. The possibility of multiple equilibria and self-fulfilling crises is showed to be related to the severity of the risk shifting problem in the economy
    Keywords: Credit market imperfections, self-fulfilling expectations, financial crises.
    JEL: G12 G33
    Date: 2006–12–03
  25. By: Dennis Gale (Joseph C. Cornwall Center for Metropolitan Studies, Rutgers-Newark)
    Date: 2006–06–27

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