Funding Shocks and Credit Quality

Tinbergen Institute Discussion Paper 2019-060/IV

39 Pages Posted: 22 Aug 2019

See all articles by Enrico C. Perotti

Enrico C. Perotti

University of Amsterdam - Finance Group; Centre for Economic Policy Research (CEPR); Tinbergen Institute

Magdalena Rola-janicka

University of Amsterdam

Date Written: June 28, 2019

Abstract

Some credit booms, though by no means all, result in financial crises. While risk-taking incentives seem a plausible cause, market participants do not appear to anticipate increasing risk. We show how credit expansions driven by credit supply shocks may be misunderstood as productivity driven, due to the opacity of bank balance sheets. Large funding shocks may induce some intermediaries to scale up speculative lending, distorting price signals. Other banks and firms may misjudge actual profitability, reinforcing the credit expansion. Similarly, at times of low saving supply credit may be inefficiently low, and speculative assets underpriced.

Suggested Citation

Perotti, Enrico C. and Rola-janicka, Magdalena, Funding Shocks and Credit Quality (June 28, 2019). Tinbergen Institute Discussion Paper 2019-060/IV. Available at SSRN: https://ssrn.com/abstract=3439972 or http://dx.doi.org/10.2139/ssrn.3439972

Enrico C. Perotti (Contact Author)

University of Amsterdam - Finance Group ( email )

Plantage Muidergracht 12
Amsterdam, 1018 TV
Netherlands
+31 20 525 4159 (Phone)
+31 20 525 5285 (Fax)

HOME PAGE: http://www.fee.uva.nl/fm/people/pero.htm

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Tinbergen Institute ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

Magdalena Rola-janicka

University of Amsterdam ( email )

Spui 21
Amsterdam, 1018 WB
Netherlands

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