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When Bad Things Happen to Good Banks: Contagious Bank Runs and Currency Crises

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  • Raphael Solomon

Abstract

The author develops a twin crisis model featuring multiple banks. At each bank, domestic and foreign depositors play a banking game. This game has a run and a no-run equilibrium. Bank failures drain reserves in addition to those drained when foreign agents convert domestic currency to foreign. The fixed exchange rate collapses if a threshold number of banks fail. Agents observe sunspots to aid their equilibrium selection. The numerical solution matches somewhat the Turkish financial sector prior to the crisis of 2001. The Turkish exchange rate appears to have exposed the financial system to a 10 per cent risk of collapse.

Suggested Citation

  • Raphael Solomon, 2004. "When Bad Things Happen to Good Banks: Contagious Bank Runs and Currency Crises," Staff Working Papers 04-18, Bank of Canada.
    • Handle: RePEc:bca:bocawp:04-18
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    References listed on IDEAS

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    Cited by:

    1. Gu, Chao, 2007. "Asymmetric Information and Bank Runs," Working Papers 07-14, Cornell University, Center for Analytic Economics.
    2. Cornell, Christopher M. & Solomon, Raphael H., 2007. "Are currency crises low-state equilibria?: An empirical, three-interest-rate model," Journal of Policy Modeling, Elsevier, vol. 29(3), pages 489-504.
    3. Ozkaya, Ata, 2013. "The Domestic Debt Intolerance and Bad Equilibrium: An Empirical Default Model," GIAM Working Papers 13-1, Galatasaray University Economic Research Center.

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    More about this item

    Keywords

    Exchange rates; Financial institutions;

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F30 - International Economics - - International Finance - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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