Financial Crisis as a Run on Profitable Banks

I build a quantitative macro finance model, motivated by empirical findings in Kim (2023) that shows money market mutual funds withdraw from dealer banks with a high return on equity because safe assets issued by issuers with a higher ROE has lower moneyness. The model features a bank that borrows money by issuing a short-term money-like debt with time-varying moneyness. When lenders deem the bank asset too risky — using the bank’s ROE as a proxy — the short-term debt no longer serves the role of money. An increase in the regulatory capital requirement affects the real economy through three different offsetting channels.