Banks, Relative Performance, and Sequential Contagion

Dimitrios Tsomocos, Sudipto Bhattacharya, Charles A.E. Goodhart and Pojanart Sunirand

No 2006-FE-10, Economics Series Working Papers from University of Oxford, Department of Economics

Abstract: We develop a multi-period general equilibrium model of bank deposit, credit, and interim inter-bank loan markets in which banks initially specialize in their choices of debtors, leading to underdiversification, but nevertheless become entwined via inter-bank markets, leading to the fortunes of one bank affecting the profits and default rates of the other in a sequential manner. Lack of (full) diversification among credit risks arises in our model owing to a relative profit argument in each banker`s utility function, which is otherwise risk- and default-averse. We examine its implications for the welfare of depositors and debtors.

Date: 2006-08-01
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Related works:
Chapter: Banks, Relative Performance, and Sequential Contagion (2012)
Journal Article: Banks, relative performance, and sequential contagion (2007)
Journal Article: Banks, relative performance, and sequential contagion (2007)
Working Paper: Banks, Relative Performance, and Sequential Contagion (2006)
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