Banking crises, sudden stops, and the effectiveness of short-term lending

Chia-Ying Chang

No 18795, Working Paper Series from Victoria University of Wellington, School of Economics and Finance

Abstract: This paper sheds light on the linkages between banking crises and sudden stops and discusses the effectiveness of short-run lending in their prevention. It develops an overlapping generations framework and incorporates the possibilities of bank runs and moral hazard of financial intermediaries. Consequently, I find that the strategy to overcome liquidity problems could worsen banks’ positions and cause bank runs and sudden stops. A small liquidity shock may still lead to a banking crisis through the depositors’ expectation. A large shock would require short-run lending to prevent an immediate bank run, but the repayment obligation may worsen moral hazard problems.

Keywords: Banking crises; Sudden stops; Moral hazard; Short-run lending; Capital flows (search for similar items in EconPapers)
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:vuw:vuwecf:18795

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