Asset illiquidity and dynamic bank capital requirements

Hajime Tomura*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

4 Citations (Scopus)


This paper introduces banks into a dynamic stochastic general equilibrium model by featuring asymmetric information as the underlying friction for banking. Asymmetric information about asset qualities causes a lemons problem in the asset market. In this environment, banks can issue liquid liabilities by pooling illiquid assets contaminated by asymmetric information. The liquidity transformation by banks results in a minimum value of common equity that banks must issue to avoid a run. This value increases with downside risk to the asset price and the expected degree of asset illiquidity. It rises during a boom if productivity shocks cause the business cycle.

Original languageEnglish
Pages (from-to)291-317
Number of pages27
JournalInternational Journal of Central Banking
Issue number3
Publication statusPublished - 2014 Sept 1
Externally publishedYes

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics


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