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Banking crises, sudden stops, and the effectiveness of short-term lending

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  • Chang, Chia-Ying

Abstract

This paper sheds light on the linkages between banking crises and sudden stops and discusses the effectiveness of short-run lending in their prevention. It develops an overlapping generations framework and incorporates the possibilities of bank runs and moral hazard of financial intermediaries. Consequently, I find that the strategy to overcome liquidity problems could worsen banks’ positions and cause bank runs and sudden stops. A small liquidity shock may still lead to a banking crisis through the depositors’ expectation. A large shock would require short-run lending to prevent an immediate bank run, but the repayment obligation may worsen moral hazard problems.

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File URL: http://researcharchive.vuw.ac.nz/handle/10063/2982
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Bibliographic Info

Paper provided by Victoria University of Wellington, School of Economics and Finance in its series Working Paper Series with number 2982.

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Date of creation: 2013
Date of revision:
Handle: RePEc:vuw:vuwecf:2982

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Postal: Alice Fong, Administrator, School of Economics and Finance, Victoria Business School, Victoria University of Wellington, PO Box 600 Wellington, New Zealand
Phone: +64 (4) 463-5353
Fax: +64 (4) 463-5014
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Web page: http://www.victoria.ac.nz/sef
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Keywords: Banking crises; Sudden stops; Moral hazard; Short-run lending; Capital flows;

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References

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  1. Sebastian Edwards, 2004. "Financial Openness, Sudden Stops, and Current-Account Reversals," American Economic Review, American Economic Association, vol. 94(2), pages 59-64, May.
  2. Boyd, John H. & Smith, Bruce D., 1997. "Capital Market Imperfections, International Credit Markets, and Nonconvergence," Journal of Economic Theory, Elsevier, vol. 73(2), pages 335-364, April.
  3. Barry Eichengreen, 2004. "Capital Flows and Crises," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262550598, December.
  4. Barry J. Eichengreen & Poonam Gupta & Ashoka Mody, 2006. "Sudden Stops and IMF-Supported Programs," IMF Working Papers 06/101, International Monetary Fund.
  5. Bernanke, Ben & Gertler, Mark & Gilchrist, Simon, 1996. "The Financial Accelerator and the Flight to Quality," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 1-15, February.
  6. Judith A. Chevalier & David S. Scharfstein, 1994. "Capital Market Imperfections and Countercyclical Markups: Theory and Evidence," NBER Working Papers 4614, National Bureau of Economic Research, Inc.
  7. Neil Wallace, 1996. "Narrow banking meets the Diamond-Dybvig model," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 3-13.
  8. Sebastian Edwards & Márcio G. P. Garcia, 2008. "Financial Markets Volatility and Performance in Emerging Markets," NBER Books, National Bureau of Economic Research, Inc, number edwa05-1, July.
  9. Nobuhiro Kiyotaki & John Moore, 1995. "Credit Cycles," NBER Working Papers 5083, National Bureau of Economic Research, Inc.
  10. Bencivenga, Valerie R & Smith, Bruce D, 1991. "Financial Intermediation and Endogenous Growth," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 195-209, April.
  11. Chang, Chia-Ying, 2012. "When banking systems meet currencies," Working Paper Series 2062, Victoria University of Wellington, School of Economics and Finance.
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Cited by:
  1. Chang, Chia-Ying, 2013. "Capital controls, capital flows, and banking crises," Working Paper Series 2979, Victoria University of Wellington, School of Economics and Finance.

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