Asset illiquidity and dynamic bank capital requirements

Research output: Contribution to journalArticle

3 Citations (Scopus)

Abstract

This paper introduces banks into a dynamic stochastic general equilibrium model by featuring asymmetric information as the underlying friction for banking. Asymmetric information about asset qualities causes a lemons problem in the asset market. In this environment, banks can issue liquid liabilities by pooling illiquid assets contaminated by asymmetric information. The liquidity transformation by banks results in a minimum value of common equity that banks must issue to avoid a run. This value increases with downside risk to the asset price and the expected degree of asset illiquidity. It rises during a boom if productivity shocks cause the business cycle.

Original languageEnglish
Pages (from-to)291-317
Number of pages27
JournalInternational Journal of Central Banking
Volume10
Issue number3
Publication statusPublished - 2014 Sep 1
Externally publishedYes

Fingerprint

Illiquidity
Capital requirements
Bank capital
Assets
Asymmetric information
Dynamic stochastic general equilibrium model
Liability
Equity
Banking
Productivity shocks
Business cycles
Downside risk
Asset markets
Liquidity
Friction
Pooling
Asset prices

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

Cite this

Asset illiquidity and dynamic bank capital requirements. / Tomura, Hajime.

In: International Journal of Central Banking, Vol. 10, No. 3, 01.09.2014, p. 291-317.

Research output: Contribution to journalArticle

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