Author : Fabian Valencia
Publisher :
ISBN 13 :
Total Pages : 40 pages
Book Rating : 4.3/5 ( download)
Book Synopsis Banks' Precautionary Capital and Persistent Credit Crunches by : Fabian Valencia
Download or read book Banks' Precautionary Capital and Persistent Credit Crunches written by Fabian Valencia and published by . This book was released on 2008 with total page 40 pages. Available in PDF, EPUB and Kindle. Book excerpt: Periods of banking distress are often followed by sizable and long-lasting contractions in bank credit. They may be explained by a declined demand by financially impaired borrowers (the conventional financial accelerator) or by lower supply by capital-constrained banks, a "credit crunch". This paper develops a bank model to study credit crunches and their real effects. In this model, banks maintain a precautionary level of capital that serves as a smoothing mechanism to avert disruptions in the supply of credit when hit by small shocks. However, for larger shocks, highly persistent credit crunches may arise even when the impulse is a one time, non-serially correlated event. From a policy perspective, the model justifies the use of public funds to recapitalize banks following a significant deterioration in their capital position.