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Financial Institutions, Financial Contagion, and Financial Crises

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Haizhou Huang (International Monetery Fund)

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Abstract

Financial crises are endogenized through institutions related to the corporate sector and the interbank market. Financial crises can emanate from financial institutions which determines the nature of equilibrium in the interbank market. In a pooling equilibrium all illiquid banks are treated in the same manner in the interbank market. With private information about one's own solvency, best illiquid banks will not borrow but rather liquidate some premature assets. The withdrawal of the best banks from the interbank market will generate negative externalities in the interbank market. Consequently, the quality of the interbank market will decline - which will make more solvent but illiquid banks withdraw from the market -- and the quality of market deteriorates further. A cycle of this process leads to a collapse of the interbank market. However, in a separating equilibrium solvent and insolvent banks are distinguishable in the interbank market, bank runs are isolated to illiquid and insolvent banks, and a bank run contagion will never occur in such an economy.

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Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 1595.

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Date of creation: 01 Aug 2000
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Handle: RePEc:ecm:wc2000:1595

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Roberto Chang & Andres Velasco, 1998. "Financial crises in emerging markets: a canonical model," Working Paper 98-10, Federal Reserve Bank of Atlanta. [Downloadable!]
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  2. Corsetti, G. & Pesenti, P. & Roubini, N., 1998. "What Caused the Asian Currency and Financial Crisis?," Papers 343, Banca Italia - Servizio di Studi.
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  3. Roberto Chang & Andres Velasco, 1998. "Financial Fragility and the Exchange Rate Regime," NBER Working Papers 6469, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. Franklin Allen & Douglas Gale, 1998. "Financial Contagion Journal of Political Economy," Center for Financial Institutions Working Papers 98-31, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
  5. Jean-Charles Rochet & Jean Tirole, 1996. "Interbank lending and systemic risk," Proceedings, Board of Governors of the Federal Reserve System (U.S.), pages 733-765.
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  6. Steven Radelet & Jeffrey D. Sachs, 1998. "The East Asian Financial Crisis: Diagnosis, Remedies, Prospects," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(1998-1), pages 1-90. [Downloadable!]
  7. Charles A. E. Goodhart & Haizhou Huang, 1999. "A model of the lender of last resort," Proceedings, Federal Reserve Bank of San Francisco.
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  8. Bolton, Patrick & Scharfstein, David S, 1996. "Optimal Debt Structure and the Number of Creditors," Journal of Political Economy, University of Chicago Press, vol. 104(1), pages 1-25, February. [Downloadable!] (restricted)
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  11. Dewatripont, M & Maskin, E, 1995. "Credit and Efficiency in Centralized and Decentralized Economies," Review of Economic Studies, Blackwell Publishing, vol. 62(4), pages 541-55, October. [Downloadable!] (restricted)
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  13. Bee Yan Aw & Sukkyun Chung & Mark J. Roberts, 1998. "Productivity and the Decision to Export: Micro Evidence from Taiwan and South Korea," NBER Working Papers 6558, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  14. Hart, Oliver & Moore, John, 1995. "Debt and Seniority: An Analysis of the Role of Hard Claims in Constraining Management," American Economic Review, American Economic Association, vol. 85(3), pages 567-85, June. [Downloadable!] (restricted)
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  15. Douglas W. Diamond & Raghuram G. Rajan, 1999. "Liquidity Risk, Liquidity Creation and Financial Fragility: A Theory of Banking," NBER Working Papers 7430, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  16. Shleifer, Andrei & Vishny, Robert W, 1993. "Corruption," The Quarterly Journal of Economics, MIT Press, vol. 108(3), pages 599-617, August. [Downloadable!] (restricted)
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    • Andrei Shleifer & Robert W. Vishny, 1993. "Corruption," NBER Working Papers 4372, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  17. Xavier Freixas, 1999. "Optimal Bail Out Policy, Conditionality and Creative Ambiguity," FMG Discussion Papers dp327, Financial Markets Group. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Raphael H. Solomon, 2004. "When Bad Things Happen to Good Banks: Contagious Bank Runs and Currency Crises," Working Papers 04-18, Bank of Canada. [Downloadable!]
  2. Elías Albagli, 2003. "El Embriague Financiero: Una Visión Alternativa de Amplificación Bancaria," Working Papers Central Bank of Chile 207, Central Bank of Chile. [Downloadable!]
  3. Katharina PISTOR, 2000. "The Standardization Of Law And Its Effect On Developing Economies," G-24 Discussion Papers 4, United Nations Conference on Trade and Development. [Downloadable!]
  4. Emilio Colombo & Akos Valentinyi, 2002. "Subsidies, Soft Budget Constraints and Financial Market Imperfections," Working Papers 50, University of Milano-Bicocca, Department of Economics, revised Feb 2002. [Downloadable!]
  5. Julien Reynaud & Rofikoh Rokhim, 2005. "Do banking crises enhance efficiency ? A case study of 1994 Turkish and 1997 Indonesian crises," Cahiers de la Maison des Sciences Economiques bla05007, Université Panthéon-Sorbonne (Paris 1). [Downloadable!]
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  6. Raphael H. Solomon, 2005. "Pocket Banks and Out-of-Pocket Losses: Links between Corruption and Contagion," Working Papers 05-23, Bank of Canada. [Downloadable!]
  7. Peter B. Clark & Haizhou Huang, 2001. "International Financial Contagion and the Fund: A Theoretical Framework," IMF Working Papers 01/137, International Monetary Fund. [Downloadable!]
  8. Jiahua Che, 2000. "Decentralized Financing, Centralized Financing and the Dual Track System: Toward a New Theory of Soft Budget Constraints," William Davidson Institute Working Papers Series 261, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
  9. Xavier Freixas & Anthony M. Santomero, 2002. "An overall perspective on banking regulation," Working Papers 02-1, Federal Reserve Bank of Philadelphia. [Downloadable!]
  10. Eric Santor, 2003. "Banking Crises and Contagion: Empirical Evidence," Working Papers 03-1, Bank of Canada. [Downloadable!]
  11. Xavier Freixas, 2003. "An Overall Perspective on Banking Regulation," Economics Working Papers 664, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
  12. Peter Clark & Haizhou Huang, 2006. "International Financial Contagion and the Fund —A Theoretical Framework," Open Economies Review, Springer, vol. 17(4), pages 399-422, December. [Downloadable!] (restricted)
  13. Nan-Kuang Chen & Hsiao-Lei Chu, 2003. "Collateral Value and Forbearance Lending," CEP Discussion Papers dp0603, Centre for Economic Performance, LSE. [Downloadable!]
  14. Maskin, Eric & Xu, Cheng-Gang, 2001. "Soft Budget Constraint Theories: From Centralization to the Market," CEPR Discussion Papers 2715, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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