Bank runs, liquidity and credit risk
AbstractIn this paper, I develop a model that addresses the links between banks’ liquidity outlook and their incentives to take credit risk. Assuming that both bank-specific liquidity shocks and credit losses are necessary to provoke bank runs, the model predicts that a bank’s incentives to mitigate its credit risk by screening decrease if the probability of a bank-specific liquidity shock declines. This suggests that the benign liquidity outlook prevailing prior to the subprime crisis may have contributed to the lack of screening by banks that has been an important causal factor in the crisis.
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Bibliographic InfoPaper provided by Bank of Finland in its series Research Discussion Papers with number 12/2008.
Length: 31 pages
Date of creation: 14 May 2008
Date of revision:
liquidity; credit risk screening; bank runs;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-05-24 (All new papers)
- NEP-BAN-2008-05-24 (Banking)
- NEP-BEC-2008-05-24 (Business Economics)
- NEP-CFN-2008-05-24 (Corporate Finance)
- NEP-FMK-2008-05-24 (Financial Markets)
- NEP-MON-2008-05-24 (Monetary Economics)
- NEP-RMG-2008-05-24 (Risk Management)
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