Financial Institutions, Contagious Risks, and Financial Crises
AbstractIn this paper contagious risks and financial crises are endogenized through the interactions among corporations, banks, and the interbank market. We show that the lack of financial discipline in a single-bank-financing economy generates informational problems and thus the malfunction of the interbank market, which constitutes a mechanism of financial contagion and may lead to a financial crisis. In contrast, financial discipline in an economy with diversified financial institutions leads to timely information disclosure from firms to banks and improves the informational environment of the interbank market. With symmetric information in the interbank market, bank runs are contained to insolvent banks and financial crises are prevented. Our theory sheds light on the causes and timing of the East Asian crisis; it also has important policy implications for the lender of last resort and banking reform.
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Bibliographic InfoPaper provided by William Davidson Institute at the University of Michigan in its series William Davidson Institute Working Papers Series with number 444.
Date of creation: 01 Jan 2001
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Banking and Finance; International Trade and Finance; financial institutions; contagious risks; financial crises;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2002-04-25 (All new papers)
- NEP-IFN-2002-04-25 (International Finance)
- NEP-MAC-2002-04-25 (Macroeconomics)
- NEP-PKE-2002-04-25 (Post Keynesian Economics)
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