Bank Panics and the Endogeneity of Central Banking

Gary Gorton and Lixin Huang ()

No 9102, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Central banking is intimately related to liquidity provision to banks during times of crisis, the lender-of-last-resort function. This activity arose endogenously in certain banking systems. Depositors lack full information about the value of bank assets so that during macroeconomic downturns they monitor their banks by withdrawing in a banking panic. The likelihood of panics depends on the industrial organization of the banking system. Banking systems with many small, undiversified banks, are prone to panics and failures, unlike systems with a few big banks that are heavily branched and well diversified. Systems of many small banks are more efficient if the banks form coalitions during times of crisis. We provide conditions under which the industrial organization of banking leads to incentive compatible state contingent bank coalition formation. Such coalitions issue money that is a kind of deposit insurance and examine and supervise banks. Bank coalitions of small banks, however, cannot replicate the efficiency of a system of big banks.

JEL-codes: E58 G21 (search for similar items in EconPapers)
Date: 2002-08
New Economics Papers: this item is included in nep-cba, nep-fin and nep-mon
Note: CF ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (21)

Published as Gorton, Gary & Huang, Lixin, 2006. "Bank panics and the endogeneity of central banking," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1613-1629, October.

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Journal Article: Bank panics and the endogeneity of central banking (2006)
Working Paper: Bank Panics and the Endogeneity of Central Banking (2002)
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