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213
Competition and Regulation in Banking
- Handbook of Corporate Finance: Financial Intermediation and Banking (North
, 2007
"... (the editor) for valuable comments and discussions. ..."
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Cited by 22 (5 self)
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(the editor) for valuable comments and discussions.
Liquidity provision vs. deposit insurance: preventing bank panics without moral hazard?
, 2001
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Interbank contagion at work: Evidence from a natural experiment
- Review of Financial Studies
, 2011
"... This article tests financial contagion due to interbank linkages. For identification, we exploit an idiosyncratic, sudden shock caused by a large-bank failure in conjunction with detailed data on interbank exposures. First, we find robust evidence that higher interbank exposure to the failed bank le ..."
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This article tests financial contagion due to interbank linkages. For identification, we exploit an idiosyncratic, sudden shock caused by a large-bank failure in conjunction with detailed data on interbank exposures. First, we find robust evidence that higher interbank exposure to the failed bank leads to large deposit withdrawals. Second, the magnitude of contagion is higher for banks with weaker fundamentals. Third, interbank linkages among surviving banks further propagate the shock. Finally, we find results suggesting that there are real economic effects. These results suggest that interbank linkages act as an important channel of contagion and hold important policy implications. (JEL G01, G21, G28, E58) “Since the onset of the financial turmoil, increased uncertainty, reflected par-ticularly in counterparty risk, has led banks to hoard liquidity. This has resulted in a significant decline of trading in the interbank money markets.”
CAUGHT BETWEEN SCYLLA AND CHARYBDIS? REGULATING BANK LEVERAGE WHEN THERE IS RENT-SEEKING AND RISK-SHIFTING
, 2011
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Asset prices and banking distress: A macroeconomic approach
- Journal of Financial stability
, 2009
"... This paper links banking with asset prices in a monetary macroeconomic model. The main innovation is to consider how falling asset prices affect the banking system through wide-spread borrower default, while deriving explicit solutions and balance sheet effects even far from the steady state. We fin ..."
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Cited by 15 (2 self)
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This paper links banking with asset prices in a monetary macroeconomic model. The main innovation is to consider how falling asset prices affect the banking system through wide-spread borrower default, while deriving explicit solutions and balance sheet effects even far from the steady state. We find that the effect of falling asset prices is indirect, non-linear, and involves feedback from the banking system in the form of credit contraction. When borrowers repay, the effect ‘passes through ’ the bank balance sheet; once borrowers default, asset prices drive bank capital, and constrained credit in turn drives asset prices. This interaction can explain capital crunches, financial instability, and banking crises, either as fundamental or as self-fulfilling outcomes. This model, unlike others, distinguishes between financial and macroeconomic stability, and makes precise the notion of balance sheet vulnerability. It also sheds some light on the role of asset prices in monetary policy and carries regulatory implications. The case studies apply the
Self-Fulfilling Credit Market Freezes
, 2010
"... This paper develops a model of a self-fulfilling credit market freeze and uses it to study alternative governmental responses to such a crisis. We study an economy in which operating firms are interdependent, with their success depending on the ability of other operating firms to obtain financing. I ..."
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Cited by 14 (2 self)
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This paper develops a model of a self-fulfilling credit market freeze and uses it to study alternative governmental responses to such a crisis. We study an economy in which operating firms are interdependent, with their success depending on the ability of other operating firms to obtain financing. In such an economy, an inefficient credit market freeze may arise in which banks abstain from lending to operating firms with good projects because of their self-fulfilling expectations that other banks will not be making such loans. Our model enables us to study the effectiveness of alternative measures for getting an economy out of an inefficient credit market freeze. In particular, we study the effectiveness of interest rate cuts, infusion of capital into banks, direct lending to operating firms by the government, and the provision of government capital or guarantees to finance or encourage privately managed lending. Our analysis provides a framework for analyzing and evaluating the standard and nonstandard instruments used by authorities during the financial crisis of 2008-2009.
Bank runs and institutions: the perils of intervention
- American Economic Review
, 2009
"... Governments typically respond to a run on the banking system by temporarily freezing deposits and by rescheduling payments to depositors. Depositors may even be required to demonstrate an urgent need for funds before being allowed to withdraw. We study ex post efficient policy responses to a bank ru ..."
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Cited by 13 (0 self)
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Governments typically respond to a run on the banking system by temporarily freezing deposits and by rescheduling payments to depositors. Depositors may even be required to demonstrate an urgent need for funds before being allowed to withdraw. We study ex post efficient policy responses to a bank run and the ex ante incentives these responses create. Given that a run is underway, the efficient response is typically not to freeze all remaining deposits, since this would impose heavy costs on individuals with urgent withdrawal needs. Instead, (benevolent) government institutions would allow additional withdrawals, creating further strain on the banking system. We show that when depositors anticipate these extra withdrawals, their incentive to participate in the run actually increases. In fact, ex post efficient interventions can generate the conditions necessary for a self-fulfilling run to occur.
Financial Innovation, Macroeconomic Stability and Systemic Crises
, 2006
"... We present a general equilibrium model of intermediation designed to capture some of the key features of the modern nancial system. The model incorporates nancial constraints and state-contingent contracts, and contains a clearly de ned pecuniary externality associated with asset re sales during per ..."
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Cited by 7 (2 self)
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We present a general equilibrium model of intermediation designed to capture some of the key features of the modern nancial system. The model incorporates nancial constraints and state-contingent contracts, and contains a clearly de ned pecuniary externality associated with asset re sales during periods of stress. If a suf ciently severe shock occurs during a credit expansion, this externality is capable of generating a systemic nancial crisis that may be self-ful lling. Our model suggests that nancial innovation and greater macroeconomic stability may have made nancial crises in developed countries less likely than in the past, but potentially more severe.
