Savings Gluts and Financial Fragility

54 Pages Posted: 8 Mar 2016 Last revised: 8 Jan 2018

Patrick Bolton

Columbia Business School - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Tano Santos

Columbia Business School; National Bureau of Economic Research (NBER)

Jose A. Scheinkman

Columbia University; Princeton University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: January 4, 2018

Abstract

Originators produce higher quality assets at a private cost. These assets can either be bought by informed intermediaries or sold in a pool with low quality assets. Savings gluts diminish origination incentives because they compress the spread between the price paid for high quality assets and the price paid for the pool. The narrowing of the spreads relaxes borrowing constraints, which results in higher leverage. Thus savings gluts generate financial fragility - the sensitivity of financial intermediaries' equity to unforeseen contingencies. The model offers a coherent narrative of the run up to the crisis.

Keywords: savings glut, cream skimming, incentives for origination, leverage, financial fragility

JEL Classification: D8, G1

Suggested Citation

Bolton, Patrick and Santos, Tano and Scheinkman, Jose A., Savings Gluts and Financial Fragility (January 4, 2018). Available at SSRN: https://ssrn.com/abstract=2743700 or http://dx.doi.org/10.2139/ssrn.2743700

Patrick Bolton

Columbia Business School - Department of Economics ( email )

420 West 118th Street
New York, NY 10027
United States

HOME PAGE: http://www0.gsb.columbia.edu/faculty/pbolton/

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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

Tano Santos

Columbia Business School ( email )

3022 Broadway - Uris Hall
Room 815
New York, NY 10027
United States
212-854-0489 (Phone)
212-316-9180 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jose A. Scheinkman (Contact Author)

Columbia University ( email )

420 W. 118th Street
New York, NY 10027
United States

HOME PAGE: http://www.princeton.edu/~joses

Princeton University - Department of Economics ( email )

26 Prospect Avenue
Princeton, NJ 08544
United States
609-258-4020 (Phone)
609-258-6419 (Fax)

HOME PAGE: http://www.princeton.edu/~joses

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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