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Bank Value and Financial Fragility

Author

Listed:
  • Karine Gobert
  • Patrick González
  • Michel Poitevin
  • Alexandra Lai

Abstract

We propose a valuation model for a bank which faces a bankruptcy risk. Banks are identified with a possibly infinite random sequence of net benefits. A bank is solvent as long as its benefits remain non-negative. To preserve distressed banks from destruction, banks will be pooled within a financial coalition. When possible, those with current positive balance sheet will refinance those in need of liquidity. Banks are refinanced to the extent that their current needs for liquidity do not exceed their expected endogenous continuation value. This value itself is affected by future refinancing possibilities. We provide a recursive formula to compute this value when there is an aggregate liquidity constraint. Nous proposons un modèle d'évaluation pour une banque sujette au risque de faire faillite. Les banques sont représentées par une séquence infinie de bénéfices aléatoires. Une banque est solvable tant que ses profits ne sont pas négatifs. Pour protéger les banques en détresse contre une possible liquidation, les banques sont membres d'une coalition financière. Lorsque c'est possible, celles qui ont un bilan courant positif refinanceront celles qui éprouvent un besoin de liquidité. Les banques sont refinancées tant que leurs besoins courants de liquidité ne dépassent pas leur valeur attendue de continuation. Cette valeur est endogène et dépend des possibilités de refinancement futures. Nous dérivons une formule récursive pour calculer cette valeur en présence d'une contrainte de liquidité agrégée.

Suggested Citation

  • Karine Gobert & Patrick González & Michel Poitevin & Alexandra Lai, 2002. "Bank Value and Financial Fragility," CIRANO Project Reports 2002rp-07, CIRANO.
    • Handle: RePEc:cir:cirpro:2002rp-07
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    File URL: https://cirano.qc.ca/files/publications/2002RP-07.pdf
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    References listed on IDEAS

    as
    1. Veronika Dolar & Césaire Meh, 2002. "Financial Structure and Economic Growth: A Non-Technical Survey," Staff Working Papers 02-24, Bank of Canada.
    2. Leland, Hayne E, 1994. "Corporate Debt Value, Bond Covenants, and Optimal Capital Structure," Journal of Finance, American Finance Association, vol. 49(4), pages 1213-1252, September.
    3. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
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    More about this item

    Keywords

    Bank value; aggregate liquidity constraint; financial coalition; refinancing; Valeur d'une banque; contrainte de liquidité agrégée; coalition financière; refinancement;
    All these keywords.

    JEL classification:

    • D46 - Microeconomics - - Market Structure, Pricing, and Design - - - Value Theory
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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