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Suresh Sundaresan

7 October 2022
WORKING PAPER SERIES - No. 2738
Details
Abstract
We develop a dynamic model of a bank which finances its asset portfolio by rolling over short-term deposits with access to LOLR liquidity. Bank faces frictions in equity issuance and loan portfolio adjustments. We calibrate our model with bank’s estimated borrowing capacity at the LOLR and funding profile. We show that rollover of debt combined with access to LOLR results in a wealth transfer from private creditors to equity holders through increased dividend payments in good states, coupled with more risk-taking and defaults in bad states. The effects are stronger for banks with more fragile funding and higher maturity intermediation.
JEL Code
E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
G32 : Financial Economics→Corporate Finance and Governance→Financing Policy, Financial Risk and Risk Management, Capital and Ownership Structure, Value of Firms, Goodwill
G33 : Financial Economics→Corporate Finance and Governance→Bankruptcy, Liquidation
G35 : Financial Economics→Corporate Finance and Governance→Payout Policy