Twin Crises and the Intermediary Role of Banks

Claudia Buch and Ralph P Heinrich

International Journal of Finance & Economics, 1999, vol. 4, issue 4, 313-23

Abstract: Banking and balance of payments crises often happen simultaneously. We show that the impact of a devaluation on the net worth of commercial banks with a short open foreign exchange position speeds up the timing of a balance of payments crisis. In an asymmetric information framework, domestic commercial banks have to pay a positive risk premium on the international capital market which is determined by their net worth. Some stylized facts from selected crises episodes are presented in order to gauge the empirical relevance of the effects that have been stressed in the model. Copyright @ 1999 by John Wiley & Sons, Ltd. All rights reserved.

Date: 1999
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