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Vulnerable Banks

Listed author(s):
  • Robin Greenwood
  • Augustin Landier
  • David Thesmar

When a bank experiences a negative shock to its equity, one way to return to target leverage is to sell assets. If asset sales occur at depressed prices, then one bank's sales may impact other banks with common exposures, resulting in contagion. We propose a simple framework that accounts for how this effect adds up across the banking sector. Our framework explains how the distribution of bank leverage and risk exposures contributes to a form of systemic risk. We compute bank exposures to system-wide deleveraging, as well as the spillover of a single bank's deleveraging onto other banks. We show how our model can be used to evaluate a variety of crisis interventions, such as mergers of good and bad banks and equity injections. We apply the framework to European banks vulnerable to sovereign risk in 2010 and 2011.

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File URL: http://www.nber.org/papers/w18537.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18537.

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Date of creation: Nov 2012
Publication status: published as Journal of Financial Economics Volume 115, Issue 3, March 2015, Pages 471–485 Cover image Vulnerable banks ☆ Robin Greenwooda, b, Augustin Landierc, , David Thesmard, e
Handle: RePEc:nbr:nberwo:18537
Note: CF
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