Uncertainty and Investment: The Financial Intermediary Balance Sheet Channel
31 Pages Posted: 14 Apr 2015
Date Written: March 2015
Rollover risk imposes market discipline on banks’ risk-taking behavior but it can be socially costly. I present a two-sided model in which a bank simultaneously lends to a firm and borrows from the short-term funding market. When the bank is capital constrained, uncertainty in asset quality and rollover risk create a negative externality that spills over to the real economy by ex ante credit contraction. Macroprudential and monetary policies can be used to reduce the social cost of market discipline and improve efficiency.
Keywords: Banks, Financial intermediaries, Investment, Balance sheets, Econometric models, Short-term debt, uncertainty, underinvestment, value, liquidation, capital, equity, revenue, risk, projects
JEL Classification: D86, E22, G20
Suggested Citation: Suggested Citation