IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Pocket Banks and Out-of-Pocket Losses: Links between Corruption and Contagion

  • Raphael H. Solomon
Registered author(s):

    The author describes a model with a corrupt banking system, in which bankers knowingly lend at market interest rates to back projects riskier than the market rate indicates. Faced with early withdrawals, bankers turn to an interbank market, which may be available in an unfettered way, available but subject to screening, or unavailable. The presence of corruption increases the probability of contagious bank failure significantly. This fact holds in a perfect information environment, as well as in some environments with imperfect information. The model suggests that financial stability can be imperilled by corrupt lending.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://www.bankofcanada.ca/wp-content/uploads/2010/02/wp05-23.pdf
    Download Restriction: no

    Paper provided by Bank of Canada in its series Working Papers with number 05-23.

    as
    in new window

    Length: 37 pages
    Date of creation: 2005
    Date of revision:
    Handle: RePEc:bca:bocawp:05-23
    Contact details of provider: Postal: 234 Wellington Street, Ottawa, Ontario, K1A 0G9, Canada
    Phone: 613 782-8845
    Fax: 613 782-8874
    Web page: http://www.bank-banque-canada.ca/

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. Eric Friedman & Simon Johnson & Peter Boone & Alasdair Breach, 1999. "Corporate Governance in the Asian Financial Crisis," Departmental Working Papers 199920, Rutgers University, Department of Economics.
    2. Allen N. Berger & Nathan H. Miller & Mitchell A. Petersen & Raghuram G. Rajan & Jeremy C. Stein, 2002. "Does Function Follow Organizational Form? Evidence From the Lending Practices of Large and Small Banks," NBER Working Papers 8752, National Bureau of Economic Research, Inc.
    3. Xavier Freixas & Bruno M. Parigi & Jean-Charles Rochet, 2003. "The lender of last resort: A 21st Century approach," Economics Working Papers 708, Department of Economics and Business, Universitat Pompeu Fabra.
    4. Douglas W. Diamond & Raghuram G. Rajan, . "Liquidity Risk, Liquidity Creation and Financial Fragility: A Theory of Banking," CRSP working papers 476, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
    5. Rafael Porta & Florencio de & Guillermo Zamarripa, 2002. "Related Lending," Yale School of Management Working Papers ysm268, Yale School of Management, revised 01 Apr 2006.
    6. Haizhou Huang & Chenggang Xu, 2000. "Financial Institutions, Financial Contagion, and Financial Crises," William Davidson Institute Working Papers Series 316, William Davidson Institute at the University of Michigan.
    7. Cantillo, Miguel & Wright, Julian, 2000. "HOw Do Firms Choose Their Leaders? An Empirical Investigation," Research Program in Finance, Working Paper Series qt8sd393sj, Research Program in Finance, Institute for Business and Economic Research, UC Berkeley.
    8. Harsanyi, John C., 1994. "Games with Incomplete Information," Nobel Prize in Economics documents 1994-1, Nobel Prize Committee.
    9. Laeven, Luc, 2001. "Insider Lending and Bank Ownership: The Case of Russia," Journal of Comparative Economics, Elsevier, vol. 29(2), pages 207-229, June.
    10. Charumilind, Chutatong & Kali, Raja & Wiwattanakantang, Yupana, 2003. "Connected Lending: Thailand before the Financial Crisis," CEI Working Paper Series 2003-19, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
    11. Sangkyun Park, 1994. "Explanations for the increased riskiness of banks in the 1980s," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 3-24.
    12. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June.
    13. Kevin Dowd, 2000. "Bank Capital Adequacy versus Deposit Insurance," Journal of Financial Services Research, Springer, vol. 17(1), pages 7-15, February.
    14. Huther, Jeff & Shah, Anwar, 2000. "Anti-corruption policies and programs : a framework for evaluation," Policy Research Working Paper Series 2501, The World Bank.
    15. Franklin Allen & Douglas Gale, 1998. "Financial Contagion Journal of Political Economy," Center for Financial Institutions Working Papers 98-31, Wharton School Center for Financial Institutions, University of Pennsylvania.
    16. Petersen, Mitchell A & Rajan, Raghuram G, 1994. " The Benefits of Lending Relationships: Evidence from Small Business Data," Journal of Finance, American Finance Association, vol. 49(1), pages 3-37, March.
    17. Nikolay Nenovsky & Evgeni Peev & Todor Yalamov, 2003. "Banks-Firms Nexus under the Currency Board: Empirical Evidence from Bulgaria," William Davidson Institute Working Papers Series 555, William Davidson Institute at the University of Michigan.
    18. Fleming, Alex & Lily Chu & Bakker, Marie-Renee, 1996. "The Baltics - Banking crises observed," Policy Research Working Paper Series 1647, The World Bank.
    19. Furfine, Craig H, 2003. " Interbank Exposures: Quantifying the Risk of Contagion," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(1), pages 111-28, February.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:bca:bocawp:05-23. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.