Financial instability and economic cycles: A model of banking crisis

Karim Elasri and Nicolas Huchet (huchet@univ-tln.fr)

Brussels Economic Review, 2010, vol. 53, issue 3/4, 393-413

Abstract: After the recent cross-border financial crisis, this paper aims to develop a new framework in order to portray the dynamics of current banking systems. In a dynamic model, international banks adopt different strategies of risk according to the economic cycle phases. It describes a mechanism by which even cautious entities are urged on adopting risky behaviors to remain competitive and attract capital. Such a new framework based on an uncommon (positive) approach is completed by simulations demonstrating that this process inexorably leads to a banking liquidity crisis, hence the importance of banking regulations for financial stability.

Keywords: Banking; Liquidity; Panic; Interbank market (search for similar items in EconPapers)
JEL-codes: E44 F34 F47 G21 (search for similar items in EconPapers)
Date: 2010
Note: Special Issue "26the Symposium on Money, Banking and Finance" Guest Editors :Sébastien Galanti and Grégory Levieuge
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