Foreseen risks

Finance

NBER Working Paper

Gomes J F;Grotteria M;Wachter J A

Francisco Gomes Marco Grotteria

2018

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

Credit bubbles; Financial intermediaries; Financial crises; Risk shifting

25277

NBER Working Paper

No

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