Financial Institutions, Financial Contagion, and Financial Crises

Author/Editor:

Haizhou Huang ; Chenggang Xu

Publication Date:

May 1, 2000

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

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.

Series:

Working Paper No. 00/92

Subject:

English

Publication Date:

May 1, 2000

ISBN/ISSN:

9781451851588/1018-5941

Stock No:

WPIEA0922000

Format:

Paper

Pages:

32

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