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Financial instability and economic cycles: A model of banking crisis

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  • Nicolas Huchet

    (LEAD - Laboratoire d'Économie Appliquée au Développement - UTLN - Université de Toulon)

  • Karim Elasri

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.

Suggested Citation

  • Nicolas Huchet & Karim Elasri, 2010. "Financial instability and economic cycles: A model of banking crisis," Post-Print hal-03591624, HAL.
    • Handle: RePEc:hal:journl:hal-03591624
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