Towards a macroeconomic model of banking crises

Daisuke Ikeda and Hidehiko Matsumoto

Chapter 14 in Research Handbook of Macroprudential Policy, 2026, pp 318-342 from Edward Elgar Publishing

Abstract: This chapter develops a tractable general equilibrium model to examine how banking crises emerge and how regulatory tools – specifically capital and liquidity requirements – can mitigate such risks. The model features households, banks, and a government that intervenes through both regulation and crisis resolution mechanisms. Banks finance long-term investments with a mix of equity and deposits, and face liquidity shocks that can trigger fire sales and endogenous insolvency. The framework allows for closed-form solutions that capture interactions between market liquidity, bank capitalization, and the incidence of financial crises. The authors use the model to assess the welfare implications of various regulatory regimes and show how policy choices affect the likelihood and severity of crises. Their findings highlight the trade-offs regulators face in designing ex-ante prudential tools versus ex-post resolution strategies in a system subject to coordination failures and funding fragilities.

Keywords: Banking crises; Capital and liquidity regulation; General equilibrium model; Financial stability; Crisis resolution (search for similar items in EconPapers)
Date: 2026
ISBN: 9781035306206
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