Asset Illiquidity and Dynamic Bank Capital Requirements
by Hajime Tomura
University of Tokyo
This paper introduces banks into a dynamic stochastic general
equilibrium model by featuring asymmetric information
as the underlying friction for banking. Asymmetric information
about asset qualities causes a lemons problem in the asset
market. In this environment, banks can issue liquid liabilities
by pooling illiquid assets contaminated by asymmetric information.
The liquidity transformation by banks results in a
minimum value of common equity that banks must issue to
avoid a run. This value increases with downside risk to the
asset price and the expected degree of asset illiquidity. It rises
during a boom if productivity shocks cause the business cycle.
JEL Codes: E44, G21, D82.
Full article (PDF, 27 pages, 361 kb)
Appendices (PDF, 19 pages, 275 kb)