Abstract

http://ssrn.com/abstract=1396805
 
 

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Unstable Banking


Andrei Shleifer


Harvard University - Department of Economics; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Robert W. Vishny


University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

April 29, 2009


Abstract:     
We propose a theory of financial intermediaries operating in markets influenced by investor sentiment. In our model, banks make loans, securitize these loans, trade in them, or hold cash. They can also borrow money, using their security holdings as collateral. We embed such banks in a stylized financial market, in which securitized loans may be mispriced, and investigate how banks allocate limited capital among the various activities, as well as how they choose their capital structure. Banks maximize profits, and there are no conflicts of interest between bank shareholders and creditors. The theory explains the cyclical behavior of credit and investment, but also accounts for the fundamental instability of banks operating in financial markets, especially when banks use leverage.

Number of Pages in PDF File: 45

Keywords: securitization, leverage, crisis, cycle

JEL Classification: G21, E32, G33

working papers series





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Date posted: April 29, 2009  

Suggested Citation

Shleifer, Andrei and Vishny, Robert W., Unstable Banking (April 29, 2009). Available at SSRN: http://ssrn.com/abstract=1396805 or http://dx.doi.org/10.2139/ssrn.1396805

Contact Information

Andrei Shleifer (Contact Author)
Harvard University - Department of Economics ( email )
Littauer Center
Cambridge, MA 02138
United States
617-495-5046 (Phone)
617-496-1708 (Fax)
HOME PAGE: http://www.economics.harvard.edu/~ashleife/
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
European Corporate Governance Institute (ECGI)
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
HOME PAGE: http://www.ecgi.org
Robert W. Vishny
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
312-702-2522 (Phone)
312-702-0118 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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