Asset Returns and Financial Fragility

How do the returns on banks' assets affect the susceptibility of the banking system to a self-fulfilling run by depositors? I study this question in a version of the model of Diamond and Dybvig (1983) with limited commitment and a non-trivial portfolio choice. I show that the relationship between these returns and financial fragility is often non-monotone: a higher return may leave banks either more or less susceptible to a run. The same is true for changes in the liquidation cost and the term premium. I derive precise conditions under which changes in each of these returns increase or decrease financial fragility

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Year of publication:	2016
Authors:	Li, Yang
Publisher:	[2016]: [S.l.] : SSRN
Subject:	Kapitaleinkommen \| Capital income \| Finanzmarkt \| Financial market \| Theorie \| Theory \| Finanzkrise \| Financial crisis \| Börsenkurs \| Share price \| Bankenkrise \| Banking crisis

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