Externalities and financial crisis – enough to cause collapse?

Marcus Miller and Lei Zhang
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Lei Zhang: Sichuan University

The Warwick Economics Research Paper Series (TWERPS) from University of Warwick, Department of Economics

Abstract: After the boom in US subprime lending came the bust - with a run on US shadow banks. The magnitude of boom and bust were, it seems, amplified by two significant externalities triggered by aggregate shocks: the endogeneity of bank equity due to mark-to-market accounting and of bank liquidity due to ‘fire-sales’ of securitised assets. We show how adding a systemic ‘bank run’ to the canonical model of Adrian and Shin allows for a tractable analytical treatment - including the counterfactual of complete collapse that forces the Treasury and the Fed to intervene.

Keywords: pecuniary externalities; bank runs; illiquidity; Lender of Last Resort; cross-border banking (search for similar items in EconPapers)
JEL-codes: G01 G11 G24 (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-ban and nep-cba
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: Externalities and financial crisis - enough to cause collapse? (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:wrk:warwec:1207

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