Financial Institutions, Financial Contagion, and Financial Crises

Haizhou Huang and Chenggang Xu

No 2000/092, IMF Working Papers from International Monetary Fund

Abstract: Financial crises are endogenized through corporate and interbank market institutions. Single-bank financing leads to a pooling equilibrium in the interbank market. With private information about one’s own solvency, the best illiquid banks will not borrow but rather will liquidate some premature assets. The withdrawals of the best banks from the interbank market may lead more solvent but illiquid banks to withdraw from the market, until the interbank market collapses. However, multi-bank financing leads to a separating equilibrium in the interbank market. Thus, bank runs are limited to illiquid and insolvent banks, and idiosyncratic shocks never trigger a contagious bank run.

Keywords: WP; interbank market; financial crisis; illiquid bank; central bank; Financial institutions; financial contagion; financial crises; SBC economy; private benefit; state bank; borrowing cost; interbank market market failure; expected return; Interbank markets; Bank solvency; Liquidity; Self-employment; East Asia (search for similar items in EconPapers)
Pages: 32
Date: 2000-05-01
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Citations: View citations in EconPapers (18)

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