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Financial Institutions, Financial Contagion, and Financial Crises

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  • Mr. Haizhou Huang
  • Chenggang Xu

Abstract

Financial crises are endogenized through corporate and interbank market institutions. Single-bank financing leads to a pooling equilibrium in the interbank market. With private information about one’s own solvency, the best illiquid banks will not borrow but rather will liquidate some premature assets. The withdrawals of the best banks from the interbank market may lead more solvent but illiquid banks to withdraw from the market, until the interbank market collapses. However, multi-bank financing leads to a separating equilibrium in the interbank market. Thus, bank runs are limited to illiquid and insolvent banks, and idiosyncratic shocks never trigger a contagious bank run.

Suggested Citation

  • Mr. Haizhou Huang & Chenggang Xu, 2000. "Financial Institutions, Financial Contagion, and Financial Crises," IMF Working Papers 2000/092, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2000/092
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    Citations

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    Cited by:

    1. 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.
    2. Elías Albagli, 2003. "El Embriague Financiero: Una Visión Alternativa de Amplificación Bancaria," Working Papers Central Bank of Chile 207, Central Bank of Chile.
    3. Xavier Freixas & Anthony M. Santomero, 2002. "An overall perspective on banking regulation," Working Papers 02-1, Federal Reserve Bank of Philadelphia.
    4. Piersanti, Giovanni, 2012. "The Macroeconomic Theory of Exchange Rate Crises," OUP Catalogue, Oxford University Press, number 9780199653126.
    5. Eric Santor, 2003. "Crisis bancarias y contagio: evidencia empírica," Monetaria, CEMLA, vol. 0(3), pages 293-344, julio-sep.
    6. Julien Reynaud & Rofikoh Rokhim, 2005. "Do banking crises enhance efficiency? A case study of 1994 Turkish and 1997 Indonesian crises," Post-Print halshs-00193306, HAL.
    7. Pistor Katharina, 2012. "Governing Interdependent Financial Systems: Lessons from the Vienna Initiative," Journal of Globalization and Development, De Gruyter, vol. 2(2), pages 1-25, January.
    8. 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.
    9. Caramazza, Francesco & Ricci, Luca & Salgado, Ranil, 2004. "International financial contagion in currency crises," Journal of International Money and Finance, Elsevier, vol. 23(1), pages 51-70, February.
    10. Nan-Kuang Chen & Hsiao-Lei Chu, 2003. "Collateral Value and Forbearance Lending," CEP Discussion Papers dp0603, Centre for Economic Performance, LSE.
    11. Raphael Solomon, 2005. "Pocket Banks and Out-of-Pocket Losses: Links between Corruption and Contagion," Staff Working Papers 05-23, Bank of Canada.
    12. Eric Santor, 2003. "Banking Crises and Contagion: Empirical Evidence," Staff Working Papers 03-1, Bank of Canada.
    13. Goodhart, Charles A.E. & Huang, Haizhou, 2005. "The lender of last resort," Journal of Banking & Finance, Elsevier, vol. 29(5), pages 1059-1082, May.
    14. Coudert, Virginie & Gex, Mathieu, 2010. "Contagion inside the credit default swaps market: The case of the GM and Ford crisis in 2005," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 20(2), pages 109-134, April.
    15. Raphael Solomon, 2004. "When Bad Things Happen to Good Banks: Contagious Bank Runs and Currency Crises," Staff Working Papers 04-18, Bank of Canada.
    16. Mr. Peter B. Clark & Mr. Haizhou Huang, 2001. "International Financial Contagion and the IMF: A Theoretical Framework," IMF Working Papers 2001/137, International Monetary Fund.

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