Foreseen Risks

66 Pages Posted: 19 Nov 2018

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: November 2018

Abstract

Large 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 fluctuates over the business cycle, so too do the incentives to engage in risky lending. The model leads to novel insights on the effects of 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.

Suggested Citation

Gomes, João F. and Grotteria, Marco and Wachter, Jessica A., Foreseen Risks (November 2018). NBER Working Paper No. w25277, Available at SSRN: https://ssrn.com/abstract=3286942

João F. Gomes (Contact Author)

The Wharton School ( email )

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Marco Grotteria

London Business School ( email )

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

Jessica A. Wachter

University of Pennsylvania - Finance Department ( email )

The Wharton School
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Philadelphia, PA 19104
United States
215-898-7634 (Phone)
215-898-6200 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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