3 ms·
> It describes a very simplified situation where due to banks short-term liabilities and long-term assets, a bank run is a valid Nash equilibrium. > There’s al
by runeks 4y ago
> It describes a very simplified situation where due to banks short-term liabilities and long-term assets, a bank run is a valid Nash equilibrium.
> There’s also some very interesting discussion at the end about preventing runs: [...]
Did they not consider matching liability and asset duration as a solution?
- rich_sasha 4y agoFor banks this often just isn't an option. If nothing else, the core business of the bank is about borrowing cheaply (hence short term) and making risky, long term loans (hence bringing in interest). If they want to finance the loans by long term loans themselves, much of the profit goes away and the business isn't sustainable. It's obviously a sliding scale but that's the starting point.
- lupire 4y agoBanks get most of their capital from equity, which is an infinite-term. Short term loans have higher interest rate, usually, but have transaction fees.
- runeks 4y agoWell, profit can always be increased by increasing risk. So the question is whether the additional risk incurred due to duration mismatch is worth the increase in profits. It's obviously worth it to the bank's shareholders if the bank is bailed out by tax payers when things go wrong. But if there's no bailout it may not be worth it for them -- at least not in the long run.
- pjc50 4y ago> Did they not consider matching liability and asset duration as a solution? People would not be keen on 30 year notice deposit accounts to match 30 year mortgages.