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Bank runs, foreign exchange reserves and credibility: When size does not matter

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  • Miller, Victoria

Abstract

The paper considers the sizes of banking sectors that are vulnerable to runs when the central bank cares about economic stability and currency peg credibility. It is shown that when banks are small, the central bank will recapitalize unhealthy banks because doing so will not compromise its peg. While recapitalizations of large banking sectors will compromise a peg, central banks will also bailout large banking sectors in distress to prevent great economic instability. Given the central bank's expected response, a range of sizes for banking systems, which are vulnerable to runs, is found along with a condition in which size will not matter. That is, if that condition is satisfied, banking sectors of all sizes will be immune to runs. The experiences of Asia and Argentina are discussed to provide anecdotal support for the model.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Financial Markets, Institutions and Money.

Volume (Year): 18 (2008)
Issue (Month): 5 (December)
Pages: 557-565

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Handle: RePEc:eee:intfin:v:18:y:2008:i:5:p:557-565

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Web page: http://www.elsevier.com/locate/intfin

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References

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  1. Alejandro Gaytan & Romain Ranciere, 2004. "Banks, Liquidity Crises and Economic Growth," Econometric Society 2004 North American Summer Meetings 399, Econometric Society.
  2. Miller, V., 2003. "Bank runs and currency peg credibility," Journal of International Money and Finance, Elsevier, vol. 22(3), pages 385-392, June.
  3. Jeffrey Sachs & Aaron Tornell & Andres Velasco, 1995. "The Collapse of the Mexican Peso: What Have We Learned?," NBER Working Papers 5142, National Bureau of Economic Research, Inc.
  4. miller, Victoria, 2006. "Getting out from between a rock and a hard place: Can china use its foreign exchange reserves to save its banks?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 16(4), pages 345-354, October.
  5. Miller, Victoria, 2000. "Central bank reactions to banking crises in fixed exchange rate regimes," Journal of Development Economics, Elsevier, vol. 63(2), pages 451-472, December.
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Cited by:
  1. Victoria Miller & Luc Vallée, 2011. "Central Bank Balance Sheets and the Transmission of Financial Crises," Open Economies Review, Springer, vol. 22(2), pages 355-363, April.

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