Financial Crisis as a Run on Profitable Banks

46 Pages Posted: 19 Oct 2023

See all articles by Sang Rae Kim

Sang Rae Kim

Vanderbilt University - Owen Graduate School of Management

Date Written: September 2023

Abstract

I build a quantitative macro finance model, motivated by empirical findings in Kim (2023) that shows money market mutual funds withdraw from dealer banks with a high return on equity (ROE) because safe assets issued by issuers with a higher ROE has lower moneyness. The model features a bank that borrows money by issuing a short- term money-like debt with time-varying moneyness. Lenders use limited public infor- mation available to them about the bank asset to assess the collateral that is backing the safe asset. When the lenders deem the bank asset too risky–using the bank’s ROE as a proxy–the short-term debt no longer serves the role of money. In this framework, an increase in the regulatory capital requirement affects the real economy through three different offsetting channels: the costly equity channel, the crisis frequency channel, and the moneyness channel.

Keywords: financial crisis, safe asset, private money, moneyness, capital requiremen

JEL Classification: E44, E61, G01, G18

Suggested Citation

Kim, Sang Rae, Financial Crisis as a Run on Profitable Banks (September 2023). Available at SSRN: https://ssrn.com/abstract=4580735 or http://dx.doi.org/10.2139/ssrn.4580735

Sang Rae Kim (Contact Author)

Vanderbilt University - Owen Graduate School of Management ( email )

401 21st Avenue South
Nashville, TN 37203
United States

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