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Financial instability and economic cycles: A model of banking crisis

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Author Info

  • Karim Elasri
  • Nicolas Huchet

Abstract

After the recent cross-border financial crisis, this paper aims to develop a new framework in order to portray the dynamics of current banking systems. In a dynamic model, international banks adopt different strategies of risk according to the economic cycle phases. It describes a mechanism by which even cautious entities are urged on adopting risky behaviors to remain competitive and attract capital. Such a new framework based on an uncommon (positive) approach is completed by simulations demonstrating that this process inexorably leads to a banking liquidity crisis, hence the importance of banking regulations for financial stability.

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File URL: https://dipot.ulb.ac.be/dspace/bitstream/2013/81139/1/5ARTICLE%20ELASRI-HUCHET.pdf
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Bibliographic Info

Article provided by ULB -- Universite Libre de Bruxelles in its journal Brussels economic review.

Volume (Year): 53 (2010)
Issue (Month): 3/4 ()
Pages: 393-413

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Handle: RePEc:bxr:bxrceb:2013/81139

Note: Special Issue "26the Symposium on Money, Banking and Finance" Guest Editors :S├ębastien Galanti and Gr├ęgory Levieuge
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Keywords: Banking; Liquidity; Panic; Interbank market;

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