A Theory of Banking Crises (Part 1)
In order to protect the public's confidence in deposit money, governments usually guarantee bank deposits implicitly or through an explicit deposit insurance system. Thus bank insolvency does not induce immediate bank runs. In many episodes of banking crises, several years passed quietly after bank insolvency had occurred, with the insolvency continuing to develop under the surface, and the rash of bank failures broke out only when the bank insolvency exceeded a certain level. In this paper I present a simple model that describes the dynamics of bank insolvency in a form that eventually results in banking system failure or bank recapitalization by the government. The main results are as follows: (1) The government cannot indefinitely postpone recognizing the fiscal loss associated with bank insolvency. (2) The consumption level is too high (low) before (after) bank recapitalization compared with the optimal level. Thus the price conditions become deflationary (inflationary) before (after) bank recapitalization. (3) Social welfare decreases as bank recapitalization is delayed.
|Date of creation:||Jul 2003|
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- Dekle, Robert & Kletzer, Kenneth, 2003.
"The Japanese banking crisis and economic growth: Theoretical and empirical implications of deposit guarantees and weak financial regulation,"
Journal of the Japanese and International Economies,
Elsevier, vol. 17(3), pages 305-335, September.
- Dekle, Robert & Kletzer, Kenneth, 2003. "The Japanese Banking Crisis and Economic Growth: Theoretical and Empirical Implications of Deposit Guarantees and Weak Financial Regulation," Santa Cruz Department of Economics, Working Paper Series qt0t6321ds, Department of Economics, UC Santa Cruz.
- Robert Dekle & Kenneth Kletzer, 2003. "The Japanese Banking Crisis and Economic Growth: Theoretical and Empirical Implications of Deposit Guarantees and Weak Financial Regulation," CIRJE F-Series CIRJE-F-225, CIRJE, Faculty of Economics, University of Tokyo.
- Dekle, Robert & Kletzer, Kenneth, 2003. "The Japanese Banking Crisis and Economic Growth: Theoretical and Empirical Implications of Deposit Guarantees and Weak Financial Regulation," Santa Cruz Center for International Economics, Working Paper Series qt0t6321ds, Center for International Economics, UC Santa Cruz.
- John H. Boyd & Pedro Gomis-Porqueras & Sungkyu Kwak & Bruce David Smith, 2014. "A User's Guide to Banking Crises," Annals of Economics and Finance, Society for AEF, vol. 15(2), pages 800-892, November.
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- Honohan, Patrick & Klingebiel, Daniela, 2000. "Controlling the fiscal costs of banking crises," Policy Research Working Paper Series 2441, The World Bank.
- Douglas Gale & Martin Hellwig, 1985. "Incentive-Compatible Debt Contracts: The One-Period Problem," Review of Economic Studies, Oxford University Press, vol. 52(4), pages 647-663. Full references (including those not matched with items on IDEAS)
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