Bank Leverage and Social Welfare | Zendy

Lawrence J. Christiano | Zendy; Daisuke Ikeda | Zendy

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Bank Leverage and Social Welfare

Author(s) -

Lawrence J. Christiano,

Daisuke Ikeda

Publication year - 2016

Publication title -

american economic review

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 16.936

H-Index - 297

eISSN - 1944-7981

pISSN - 0002-8282

DOI - 10.1257/aer.p20161090

Subject(s) - leverage (statistics) , creditor , economics , welfare , externality , balance sheet , general equilibrium theory , social welfare , microeconomics , argument (complex analysis) , agency cost , bank run , monetary economics , debt , finance , market economy , law , computer science , corporate governance , biochemistry , chemistry , machine learning , political science , market liquidity , shareholder

We describe a general equilibrium model in which an agency problem arises because bankers must exert an unobserved and costly effort to perform their task. Suppose aggregate banker net worth is too low to insulate creditors from bad outcomes on their balance sheet. Then, banks borrow too much in equilibrium because there is a pecuniary externality associated with bank borrowing. Social welfare is increased by imposing a binding leverage restriction on banks. We formalize this argument and provide a numerical example.

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