Foreseen risks

Subject

Finance

Publishing details

NBER Working Paper

Authors / Editors

Gomes J F; Grotteria M; Wachter J A

Biographies

Publication Year

2018

Abstract

Financial crises tend to follow rapid credit expansions. Causality, however, is far from obvious. We show how this pattern arises naturally when financial intermediaries optimally exploit economic rents that drive their franchise value. As this franchise value varies over the business cycle, so too do the incentives to engage in risky lending. The model leads to novel insights on the effects of recent unconventional monetary policies in developed economies. We argue that bank lending might have responded less than expected to these interventions because they enhanced franchise value, inadvertently encouraging banks to pursue safer investments in low-risk government securities

Keywords

Credit bubbles; Financial intermediaries; Financial crises; Risk shifting

Series Number

25277

Series

NBER Working Paper