Liquidity Shortages and Banking Crises

Douglas Diamond and Raghuram Rajan

Journal of Finance, 2005, vol. 60, issue 2, 615-647

Abstract: We show in this article that bank failures can be contagious. Unlike earlier work where contagion stems from depositor panics or contractual links between banks, we argue that bank failures can shrink the common pool of liquidity, creating, or exacerbating aggregate liquidity shortages. This could lead to a contagion of failures and a total meltdown of the system. Given the costs of a meltdown, there is a possible role for government intervention. Unfortunately, liquidity and solvency problems interact and can cause each other, making it hard to determine the cause of a crisis. We propose a robust sequence of intervention.

Date: 2005
References: Add references at CitEc
Citations: View citations in EconPapers (382)

Downloads: (external link)
https://doi.org/10.1111/j.1540-6261.2005.00741.x

Related works:
Working Paper: Liquidity Shortages and Banking Crises (2003)
Working Paper: Liquidity Shortages and Banking Crises (2002)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bla:jfinan:v:60:y:2005:i:2:p:615-647

Ordering information: This journal article can be ordered from
http://www.afajof.org/membership/join.asp

Access Statistics for this article

More articles in Journal of Finance from American Finance Association Contact information at EDIRC.
Bibliographic data for series maintained by Wiley Content Delivery ().