Bank Heterogeneity and Financial Stability

Itay Goldstein, Alexandr Kopytov, Lin Shen and Haotian Xiang

No 27376, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study how heterogeneity in banks’ asset holdings affects fragility. In the model, banks face a risk of bank runs and have to liquidate long-term assets in a common market to repay runners. Liquidation prices are depressed when many banks sell their assets at the same time. When banks are homogeneous, their selling behaviors are synchronized, and bank runs are exacerbated. We show that differentiating banks to some extent enhances the stability of all banks, even those whose asset performance ends up being weaker. Our analyses provide new insights about the regulation of banking sector’s architecture and the design of government support during crises.

JEL-codes: G01 G21 G23 (search for similar items in EconPapers)
Date: 2020-06
New Economics Papers: this item is included in nep-ban and nep-cba
Note: CF
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Citations: View citations in EconPapers (9)

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