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Banks, relative performance, and sequential contagion

Author

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  • Dimitrios Tsomocos
  • Sudipto Bhattacharya
  • Charles Goodhart
  • Pojanart Sunirand

Abstract

We develop a multi-period general equilibrium model of bank deposit, credit, and interim inter-bank loan markets in which banks initially specialize in their choices of debtors, leading to under-diversification, but nevertheless become entwined via inter-bank markets, leading to the fortunes of one bank affecting the profits and default rates of the other in a sequential manner. Lack of (full) diversification among credit risks arises in our model owing to a relative profit argument in each banker's utility function, which is otherwise risk- and default-averse. We examine its implications for the welfare of depositors and debtors.
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  • Dimitrios Tsomocos & Sudipto Bhattacharya & Charles Goodhart & Pojanart Sunirand, 2007. "Banks, relative performance, and sequential contagion," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 32(2), pages 381-398, August.
    • Handle: RePEc:spr:joecth:v:32:y:2007:i:2:p:381-398
    DOI: 10.1007/s00199-006-0190-7
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    Cited by:

    1. Junichi Fujimoto, 2014. "Speculative attacks with multiple targets," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 57(1), pages 89-132, September.
    2. Benjamin Tabak & Daniel Cajueiro & Dimas Fazio, 2013. "Financial fragility in a general equilibrium model: the Brazilian case," Annals of Finance, Springer, vol. 9(3), pages 519-541, August.
    3. Roman Garcia & Dimitri Lorenzani & Daniel Monteiro & Francesco Perticari & Bořek Vašíček & Lukas Vogel, 2021. "Financial Spillover and Contagion Risks in the Euro Area in 2007-2019," European Economy - Discussion Papers 137, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    4. Goodhart, C.A.E. & Sunirand, P. & Tsomocos, D.P., 2011. "The optimal monetary instrument for prudential purposes," Journal of Financial Stability, Elsevier, vol. 7(2), pages 70-77, June.
    5. Diemo Dietrich & Achim Hauck, 2020. "Interbank borrowing and lending between financially constrained banks," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 70(2), pages 347-385, September.
    6. Goel, Anand M. & Song, Fenghua & Thakor, Anjan V., 2014. "Correlated leverage and its ramifications," Journal of Financial Intermediation, Elsevier, vol. 23(4), pages 471-503.
    7. Dmitry Levando, 2012. "A Survey Of Strategic Market Games," Economic Annals, Faculty of Economics and Business, University of Belgrade, vol. 57(194), pages 63-106, July - Se.

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    More about this item

    Keywords

    Relative performance; Sequential contagion; Banks; C33; C68; E4; G;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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