Financial Institutions, Financial Contagion, and Financial Crises
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Summary:
Financial crises are endogenized through corporate and interbank market institutions. Single-bank financing leads to a pooling equilibrium in the interbank market. With private information about one’s own solvency, the best illiquid banks will not borrow but rather will liquidate some premature assets. The withdrawals of the best banks from the interbank market may lead more solvent but illiquid banks to withdraw from the market, until the interbank market collapses. However, multi-bank financing leads to a separating equilibrium in the interbank market. Thus, bank runs are limited to illiquid and insolvent banks, and idiosyncratic shocks never trigger a contagious bank run.
Series:
Working Paper No. 2000/092
Subject:
Asset and liability management Bank solvency Banking Financial crises Financial markets Financial sector policy and analysis Interbank markets Labor Liquidity Self-employment
English
Publication Date:
May 1, 2000
ISBN/ISSN:
9781451851588/1018-5941
Stock No:
WPIEA0922000
Pages:
32
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