Financial Institutions, Financial Contagion, and Financial Crises

Haizhou Huang (haizhou.huang@gmail.com) and Chenggang Xu

Working Papers from Chicago - Graduate School of Business

Abstract: This paper endogenizes financial contagion and financial crises from financial institutions. We show that financial crises can emanate from financial institutions which generate soft-budget constraints (SBC). The prevailing SBC in an economy distort in-formation such that the interbank lending market faces a "lemon" problem. The lemon problem in the lending market may contribute to bank-run contagions and can lead to the collapse of the lending market while inducing a run on the economy. Moreover, due to the lemon problem in the financial system, a rational government policy in this economy will lead to a SBC trap that all the illiquid banks are to be bailed out.

Keywords: FINANCIAL INSTITUTIONS; FINANCIAL CRISIS (search for similar items in EconPapers)
JEL-codes: D20 D80 E58 G20 G30 P50 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2000
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Citations: View citations in EconPapers (3)

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Related works:
Working Paper: Financial Institutions, Financial Contagion, and Financial Crises (2000)
Working Paper: Financial Institutions, Financial Contagion, and Financial Crises (2000)
Working Paper: Financial Institutions, Financial Contagion, and Financial Crises (1999)
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Persistent link: https://EconPapers.repec.org/RePEc:fth:chicbu:21

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