The Irish Risky Lending Gap.
National University of Ireland Maynooth.
This paper develops a simple model of the gap between socially
and privately optimal bank lending when a bank has an overhang of
impaired loans, and analyzes government policies designed to close
this gap. The impaired loans have risky cash fows but observable
market values. A number of basic concepts are explicated including
the risky lending gap, the capital component and asset risk component
of the risky lending gap, capital injections versus asset purchases as
policy tools, decomposition of the e¤ects of asset purchases into loan
substitution and risk absorption e¤ects, the supply schedule of risky
lending, the no-lending trap, and a risk-capital metric for comparing
the various policy choices. The model is calibrated to match the cur-
rent Irish banking environment and some tentative policy implications
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