Foreseen Risks

67 Pages Posted: 12 Jan 2018 Last revised: 22 Apr 2020

See all articles by Joao F. Gomes

Joao F. Gomes

The Wharton School

Marco Grotteria

London Business School

Jessica A. Wachter

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: April 6, 2020

Abstract

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.

Keywords: Credit Bubbles, Financial intermediaries, Financial Crises, Risk Shifting

JEL Classification: G01, G18, G21, G32

Suggested Citation

Gomes, João F. and Grotteria, Marco and Wachter, Jessica A., Foreseen Risks (April 6, 2020). Available at SSRN: https://ssrn.com/abstract=3099061 or http://dx.doi.org/10.2139/ssrn.3099061

João F. Gomes

The Wharton School ( email )

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Marco Grotteria

London Business School ( email )

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United Kingdom

HOME PAGE: http://https://sites.google.com/site/marcogrotteria/

Jessica A. Wachter (Contact Author)

University of Pennsylvania - Finance Department ( email )

The Wharton School
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Philadelphia, PA 19104
United States
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215-898-6200 (Fax)

National Bureau of Economic Research (NBER)

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