Market Discipline and Systemic Risk

We analyze a general equilibrium model in which financial institutions generate endogenous systemic risk. Banks optimally select correlated investments and thereby expose themselves to fire-sale risk so as to sharpen their incentives. Systemic risk is therefore a natural consequence of banks’ fundamental role as delegated monitors. Our model sheds light on recent and historical trends in measured systemic risk. Technological innovations and government-directed lending can cause surges in systemic risk. Strict capital requirements and well-designed government-asset purchase programs can combat systemic risk. This paper was accepted by Gustavo Manso, finance.

• 저널Management Science · 66(2) · 764–782
• 토픽Banking stability, regulation, efficiency · Finance
• DOI10.1287/mnsc.2018.3248
• 저자Alan D. Morrison, Ansgar Walther