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Financial Risk Capacity / Saki Bigio, Adrien d'Avernas.
- Format:
- Book
- Author/Creator:
- Bigio, Saki.
- Series:
- Working Paper Series (National Bureau of Economic Research) no. w26561.
- NBER working paper series no. w26561
- Language:
- English
- Physical Description:
- 1 online resource: illustrations (black and white);
- Place of Publication:
- Cambridge, Mass. National Bureau of Economic Research 2019.
- Summary:
- Financial crises are particularly severe and lengthy when banks fail to recapitalize after bearing large losses. We present a model that explains the slow recovery of bank capital and economic activity. Banks provide intermediation in markets with information asymmetries. Large equity losses force banks to tighten intermediation, which exacerbates adverse selection. Adverse selection lowers bank profit margins which slows both the internal growth of equity and equity injections. This mechanism generates financial crises characterized by persistent low growth. The lack of equity injections during crises is a coordination failure that is solved when the decision to recapitalize banks is centralized.
- Notes:
- Print version record
- December 2019.
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