Bank fragility and growth expectations

Proto, E. (2007) Bank fragility and growth expectations. BE Journal of Economic Analysis and Policy, 7(1), 55. (doi: 10.2202/1935-1682.1720)

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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:Articles
Glasgow Author(s) Enlighten ID:Proto, Professor Eugenio
Authors: Proto, E.
College/School:College of Social Sciences > Adam Smith Business School > Economics
Journal Name:BE Journal of Economic Analysis and Policy
Publisher:De Gruyter
ISSN (Online):1935-1682
Published Online:05 November 2007

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