Working Paper: NBER ID: w29223
Authors: Jeremy I. Bulow; Paul D. Klemperer
Abstract: Banks’ reluctance to repair their balance sheets, combined with deposit insurance and regulatory forbearance in recognizing greater risks and losses, can lead to solvency problems that look like liquidity (bank-run) crises. Regulatory forbearance incentivizes banks to both retain risky loans and reject new good opportunities. With sufficient regulatory forbearance, partially-insured banks act exactly as if they are fully insured. Stress tests certify that uninsured creditors will be paid, not that banks are solvent, and have ambiguous effects on the efficiency of investment.
Keywords: No keywords provided
JEL Codes: G10; G21; G28; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| regulatory forbearance (G28) | retention of risky loans (G21) |
| misdiagnosis of solvency issues (G33) | regulatory distortions (L59) |
| design of stress tests (C90) | perceptions of bank solvency (G21) |
| design of stress tests (C90) | investment decisions (G11) |
| regulatory forbearance (G28) | pseudoliquidity constraint on banks (E51) |
| pseudoliquidity constraint on banks (E51) | complicates capital requirements (G28) |
| pseudoliquidity constraint on banks (E51) | complicates investment behaviors (G41) |