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Financial Institutions, Financial Contagion, and Financial Crises

  • Haizhou Huang
  • Chenggang Xu

Financial crises are endogenized through corporate and interbank market institutions. Single-bank financing leads to a pooling equilibrium in the interbank market. With private information about one’s own solvency, the best illiquid banks will not borrow but rather will liquidate some premature assets. The withdrawals of the best banks from the interbank market may lead more solvent but illiquid banks to withdraw from the market, until the interbank market collapses. However, multi-bank financing leads to a separating equilibrium in the interbank market. Thus, bank runs are limited to illiquid and insolvent banks, and idiosyncratic shocks never trigger a contagious bank run.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 00/92.

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Length: 32
Date of creation: 01 May 2000
Date of revision:
Handle: RePEc:imf:imfwpa:00/92
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