Financial Institutions, Financial Contagion, and Financial Crises
IMF Working Papers, May 1, 2000
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- Financial Institutions, Financial Contagion, and Financial Crises
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Bibliographic details
- Authors: Haizhou Huang, Chenggang Xu
- Published: May 1, 2000
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451851588.001
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.
- Multi-bank financing leads to a separating equilibrium in the interbank market.
- Under multi-bank financing, bank runs are limited to illiquid and insolvent banks, and idiosyncratic shocks never trigger a contagious bank run.
Key findings and mechanisms
- Single-bank financing → pooling equilibrium in the interbank market.
- Private information about own solvency → the best illiquid banks choose asset liquidation over borrowing.
- Withdrawal behavior of the best banks can cascade → potential collapse of the interbank market.
- Multi-bank financing → separating equilibrium, which prevents contagion from idiosyncratic shocks.
- Conclusion emphasized: idiosyncratic shocks never trigger a contagious bank run under multi-bank financing.
Subjects and keywords (as listed)
- Subject: Asset and liability management, Bank solvency, Banking, Financial crises, Financial markets, Financial sector policy and analysis, Interbank markets, Labor, Liquidity, Self-employment
- Keywords: Bank solvency, borrowing cost, central bank, East Asia, expected return, financial contagion, financial crises, financial crisis, Financial institutions, illiquid bank, interbank market, interbank market market failure, Interbank markets, Liquidity, private benefit, SBC economy, Self-employment, state bank, WP
Implications highlighted by the paper
- Institutional design of bank financing (single-bank vs multi-bank) is central to whether interbank markets experience pooling behavior that can lead to systemic runs.
- Multi-bank financing structures act to limit runs to genuinely illiquid and insolvent banks, reducing the risk of contagious bank runs from idiosyncratic shocks.
Haizhou Huang and Chenggang Xu, "Financial Institutions, Financial Contagion, and Financial Crises", IMF Working Papers 2000, 092 (2000), May 1, 2000.
Content in this bundle
- Financial Institutions, Financial Contagion, and Financial Crises - WP/00/92