Chaotic banking crises and regulations

Jess Benhabib, Jianjun Miao and Pengfei Wang

Economic Theory, 2016, vol. 61, issue 2, No 8, 393-422

Abstract: Abstract We study a model where limited liability and enforcement permits bank owners to shift the risk of their asset portfolios to the depositors. Incentive-compatible equilibria require the franchise value of the bank to exceed the value that the bank owners can obtain by undertaking excessively risky investments, and defaulting on deposits when investment returns are low. Our model generates multiple stationary equilibria as well as chaotic equilibria that can lead to coordination failures, making bank runs, bank defaults, and banking crises more likely. We suggest that banking regulations, including leverage limits, central bank credit policies, as well as restrictions on bank size and deposit rate ceilings can be instituted not only to enhance stable franchise values and sound asset portfolios, but also to eliminate multiple and complex equilibria.

Keywords: Banking crisis; Risk taking; Risk-shifting; Chaos; Self-fulfilling Equilibria; Incentive constraints; Coordination failure (search for similar items in EconPapers)
JEL-codes: E44 G01 G21 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

Downloads: (external link)
http://link.springer.com/10.1007/s00199-016-0952-9 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
Journal Article: Chaotic banking crises and regulations (2016)
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:spr:joecth:v:61:y:2016:i:2:d:10.1007_s00199-016-0952-9

Ordering information: This journal article can be ordered from
http://www.springer. ... eory/journal/199/PS2

DOI: 10.1007/s00199-016-0952-9

Access Statistics for this article

Economic Theory is currently edited by Nichoals Yanneils

More articles in Economic Theory from Springer, Society for the Advancement of Economic Theory (SAET) Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().