Review of Financial Studies Vol. 34 No. 3 2021
Savings Gluts and Financial Fragility
Abstract
We propose an incentive-based theory of how a savings glut produces financial fragility. Originators must be incentivized to produce high-quality assets. Assets are distributed to informed intermediaries or uninformed investors. A savings glut reduces origination incentives by compressing spreads between the prices paid for high-quality assets by informed intermediaries and prices paid by uninformed investors for generic assets. The narrowing of spreads relaxes intermediaries’ borrowing constraints, resulting in higher leverage. This generates financial fragility: intermediaries are more likely to become insolvent if unforeseen losses arise. Our model offers a coherent narrative of the run-up to the Global Financial Crisis.
- DOI
- 10.1093/rfs/hhaa074
- Volume
- 34
- Issue
- 3
- Pages
- 1408-1444
- Language
- en
- Sources
- bibtex:phds-export.bib crossref openalex