Credit crunches from occasionally binding bank borrowing constraints

Arbeitspapier

We present a model in which banks and other financial intermediaries face both occasionally binding borrowing constraints, and costs of equity issuance. Near the steady state, these intermediaries can raise equity finance at no cost through retained earnings. However, even moderately large shocks cause their borrowing constraints to bind, leading to contractions in credit offered to firms, and requiring the intermediaries to raise further funds by paying the cost to issue equity. This leads to the occasional sharp increases in interest spreads and the counter-cyclical, positively skewed equity issuance that are characteristic of the credit crunches observed in the data.

Object Details

• ISBN: 978-3-95729-543-9
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Bundesbank Discussion Paper ; No. 57/2018

Classification and Topics

• Classification: Wirtschaft ; Investment; Capital; Intangible Capital; Capacity ; Business Fluctuations; Cycles ; Money Supply; Credit; Money Multipliers
• Subject: Occasionally binding constraints ; Credit crunches ; Financial crises ; Spreads ; Dividends ; Equity ; Banking

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Holden, Tom D. ; Levine, Paul ; Swarbrick, Jonathan M.
• Event: Veröffentlichung
• (who): Deutsche Bundesbank
• (where): Frankfurt a. M.
• (when): 2018

Further information

• Handle: http://hdl.handle.net/10419/191797
• Last update: 10.03.2025, 11:44 AM CET