Financial instability and economic cycles: A model of banking crisis

Nicolas Huchet () and Karim Elasri
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Nicolas Huchet: LEAD - Laboratoire d'Économie Appliquée au Développement - UTLN - Université de Toulon

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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.

Date: 2010
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Published in Brussels Economics Review, 2010, 54 (3/4), pp.393-413

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-03591624

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