Banks, Capital Flows and Financial Crises

Posted: 9 Jul 2021

See all articles by Ozge Akinci

Ozge Akinci

Federal Reserve Bank of New York

Albert Queraltó

affiliation not provided to SSRN

Multiple version iconThere are 2 versions of this paper

Date Written: November, 2014

Abstract

This paper proposes a macroeconomic model with financial intermediaries (banks), in which banks face occasionally binding leverage constraints and may endogenously affect the strength of their balance sheets by issuing new equity. The model can account for occasional financial crises as a result of the nonlinearity induced by the constraint. Banks' precautionary equity issuance makes financial crises infrequent events occurring along with \"regular\" business cycle fluctuations. We show that an episode of capital infl ows and rapid credit expansion, triggered by low country interest rates, leads banks to endogenously decrease the rate of equity issuance, contributing to an increase in the likelihood of a crisis. Macroprudential policies directed at strengthening banks' balance sheets, such as capital requirements, are shown to lower the probability of financial crises and to enhance welfare.

JEL Classification: E32, F41, F44, G15

Suggested Citation

Akinci, Ozge and Queraltó, Albert, Banks, Capital Flows and Financial Crises (November, 2014). International Finance Discussion Paper No. 1121, Available at SSRN: https://ssrn.com/abstract=3879294

Ozge Akinci (Contact Author)

Federal Reserve Bank of New York ( email )

New York, NY 10045
United States

Albert Queraltó

affiliation not provided to SSRN

No Address Available

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