On the instability of banking and other financial intermediation

Chao Gu, Cyril Monnet, Ed Nosal and Randall Wright

No 862, BIS Working Papers from Bank for International Settlements

Abstract: Are financial intermediaries inherently unstable and, if so, why? To address this, we analyse whether model economies with financial intermediation are particularly prone to multiple, cyclic or stochastic equilibria. Several formalisations are considered: a dynamic version of Diamond-Dybvig banking incorporating reputational considerations; a model with fixed costs and delegated investment as in Diamond; one with bank liabilities serving as payment instruments similar to currency in Lagos-Wright; and one with intermediaries as dealers in decentralised asset markets, similar to Duffie et al. Although the economics and mathematics differ across specifications, in each case financial intermediation engenders instability in a precise sense.

Keywords: banking; financial intermediation; instability; volatility (search for similar items in EconPapers)
JEL-codes: D02 E02 E44 G21 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2020-05
New Economics Papers: this item is included in nep-ban, nep-dge, nep-fdg, nep-mac, nep-mon and nep-ore
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Related works:
Working Paper: On the Instability of Banking and Other Financial Intermediation (2019)
Working Paper: On the Instability of Banking and other Financial Intermediation (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:bis:biswps:862

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