Uncertainty and Investment: The Financial Intermediary Balance Sheet Channel

Rollover risk imposes market discipline on banks' risk-taking behavior but it can be sociallycostly. I present a two-sided model in which a bank simultaneously lends to a firm andborrows from the short-term funding market. When the bank is capital constrained,uncertainty in asset quality and rollover risk create a negative externality that spills over tothe real economy by ex ante credit contraction. Macroprudential and monetary policies canbe used to reduce the social cost of market discipline and improve efficiency.