TY  - JOUR
AU  - Shleifer,Andrei
AU  - Vishny,Robert W.
TI  - Unstable Banking
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 14943
PY  - 2009
Y2  - May 2009
UR  - http://www.nber.org/papers/w14943
L1  - http://www.nber.org/papers/w14943.pdf
N1  - Author contact info:
Andrei Shleifer
Department of Economics
Harvard University
Littauer Center M-9
Cambridge, MA 02138
Tel: 617/495-5046
Fax: 617/496-1708
E-Mail: ashleifer@harvard.edu

Robert W. Vishny
Booth School of Business
The University of Chicago
5807 South Woodlawn Avenue
Chicago, IL  60637
Tel: 773/702-2522
Fax: 773/834-1920
E-Mail: Rvishny@gmail.com
AB  - We propose a theory of financial intermediaries operating in markets influenced by investor sentiment.  In our model, banks make loans, securitize these loans, trade in them, or hold cash.  They can also borrow money, using their security holdings as collateral.  We embed such banks in a stylized financial market, in which securitized loans may be mispriced, and investigate how banks allocate limited capital among the various activities, as well as how they choose their capital structure.  Banks maximize profits, and there are no conflicts of interest between bank shareholders and creditors.  The theory explains the cyclical behavior of credit and investment, but also accounts for the fundamental instability of banks operating in financial markets, especially when banks use leverage.
ER  -