Type: Working Paper
Financial Crisis Resolution
Working Paper, EUI MWP, 2012/14
SCHROTH, Josef, Financial Crisis Resolution, EUI MWP, 2012/14 - https://hdl.handle.net/1814/22796
Retrieved from Cadmus, EUI Research Repository
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.
Cadmus permanent link: https://hdl.handle.net/1814/22796
Series/Number: EUI MWP; 2012/14