Moheeput, Ashwin (2008) Financial systems, micro-systemic risks and Central Bank policy: an analytical taxonomy of the literature. Working Paper. University of Warwick, Department of Economics, Coventry.

Preview

PDF WRAP_Moheeput_twerp_856.pdf - Requires a PDF viewer such as GSview, Xpdf or Adobe Acrobat Reader Download (381Kb)

Abstract

This paper reviews and categorises the literature on micro-systemic risks and on optimal policies designed to mitigate these risks. Micro-systemic risks are risks to the financial system that occur when the interaction of a bank with other banks or with financial markets, can propagate an initially localised shock to the whole financial system and can prevent the latter from fulfilling its intermediation and distributional roles. The severe episodes of financial crises that have plagued economies - developed and emerging markets alike - have made more compelling, the need for policymakers such as central banks, to develop prudential tools as part of crisis prevention and crisis management policies. We review the success of these policies under different theoretical paradigms. The paper ends with a brief synopsis of financial accelerator models which stress on how imperfections in financial markets may magnify the swings and intensity of business cycles and have a more entrenched impact on the macroeconomy.

Item Type:	Working or Discussion Paper (Working Paper)
Subjects:	H Social Sciences > HG Finance H Social Sciences > HB Economic Theory
Divisions:	Faculty of Social Sciences > Economics
Library of Congress Subject Headings (LCSH):	Financial crises, Business cycles, Banks and banking, Central, Risk management
Series Name:	Warwick economic research papers
Publisher:	University of Warwick, Department of Economics
Place of Publication:	Coventry
Date:	April 2008
Number:	No.856
Number of Pages:	46
Status:	Not Peer Reviewed
Access rights to Published version:	Open Access
References:	[1]Aghion,P., P.Bolton and M.Dewatripont (2000): “Contagious bank failures in a free banking system”, European Economic Review, 44, 713-718 [2]Alger, G. (1998): “A welfare Analysis of the Interbank market”, GREMAQ, Universite des Sciences Sociales. Mimeo. [3]Allen, F. and D.Gale (1994): “Limited Market Participation and Volatility of Asset Price”, American Economic Review, 84(4), 933-955 [4]Allen, F. and D.Gale (1998): “Optimal Financial Crises”, Journal of Finance, 53(4), 1245-1284 [5]Allen, F. and D.Gale (2000): “Financial Contagion”, Journal of Political Economy, 108, 1-33 [6]Allen, F. and D.Gale (2004): “Financial intermediaries and Financial Markets, Econometrica, Vol.72, No.4, 1023-1061 [7]Bernanke, B. (1983): “Agency costs, Net Worth and Business Fluctuations”, American Economic Review, 79(1), 14-31 [8]Bernanke, B. and A. Blinder (1992): “The Federal Funds Rate and the Channels of Monetary Transmission”, American Economic Review, Vol.82, No. 4, 901-921 [9] Bernanke, B. and M. Gertler (1995): “Inside the Black Box: The Credit Channel and Monetary Policy Transmission”, Journal of Economic Perspective, Vol. 9, No. 4, 27-48 [8]Besanko, D. and G. Kanatas (1993): “Credit market equilibrium with bank monitoring and moral hazard”, Review of Financial Studies, 6, 213-232 [9]Bhattacharya, S. and D.Gale (1987): “Preference shocks, Liquidity and Central Bank Policy” in New Approaches to Monetary Economics, Barnett, W. and K.Singleton (eds), New York, Cambridge University press [10]Bhattacharya, S. and P. Fulghieri (1994): “Uncertain Liquidity and interbank contracting”, Economics Letters, 44: 287-294 [11]Calomiris, C. and G. Gorton (1991): “ The origins of Banking Panics, Models, Facts and Banking Regulation”, in Hubbard,G. (eds), Financial markets and Financial crises, University of Chicago Press, Chicago, Illinois [11]Calomiris, C. and C. Kahn (1991): “ The role of Demandable Debt in structuring optimal bank arrangements”, American Economic Review, 81, 497-513 [12]Chang, R. and A. Velasco (1999): “Liquidity Crises in Emerging Markets: Theory and Policy”, NBER Macroeconomics Annual [13]Chari,V.V. and R.Jagannathan (1988): “Banking Panics, Information and Rational expectations”, Journal of Finance, 43(3)., 749-763 [14]Chen, Y. (1999): “Banking Panics: The role of First-Come, First-Serve Rule and Information Externalities”, Journal of Political Economy, 107(5), 946-968 [15]Cifuentes, R. , G.Ferrucci and H.S.Shin (2003): “Liquidity Risk and Contagion”, Mimeo, Bank of England [16] Cooper, R. and Thomas Ross (1998): “Bank runs : Deposit Insurance and Capital Requirements”, mimeo, Boston University 1998 series [17]Dasgupta, A. (2003): “Financial Contagion through Capital Connections: A model of the origin and spread of Bank Panics”, Journal of the European Economic Association, [18]Diamond, D. and P.Dybvig (1983): “Bank Runs, Deposit Insurance and Liquidity”, Journal of Political Economy, 91(3): 401-419 [19]Diamond, D. and R.Rajan (2000): “A Theory of Bank Capital”, Journal of Finance, 55(6), 2431-65 [20]Diamond, D. and R.Rajan (2001): “Liquidity Risk, Liquidity Creation and Financial Fragility: a theory of Banking”, Journal of Political Economy, 109(2), 287-327 [21]Diamond, D. and R.Rajan (2001): “Banks and Liquidity”, American Economic Review, Papers and Proceedings, 91, 422-425 [22]Donaldson, G. (1992): “Costly Liquidation, Interbank Trade, Bank Runs and Panics”, Journal of Financial Intermediation, 2: 59-82 [23]Flannery,M. (1996): “Financial Crises, Payments System Problems and Discount Window Lending”, Journal of Money, Credit and Banking, 28, 804-824 [24]Freixas, X., B.Parigi and J.C.Rochet(2000): “Systemic Risk, Interbank Relations and Liquidity Provision by the Central Bank”, Journal of Money, Credit and Banking, 32(3), 611-638 [25] Freixas, X. and J.C.Rochet: “Microeconomics of Banking”, MIT Press, Cambridge, Massachussetts [26] Gale, D. (2004): “Notes on Optimal Capital Regulation”, [27]Goldstein, I. and A.Pauzner(2002): “ Demand Deposits and Probability of bank runs”, mimeo, Duke University [28]Goodfried, M. and R.G.King (1998): “Financial Deregulation, Monetary Policy and Central Banking”, Federal Reserve Bank of Richmond Economic Review, vol.74, no.3 [29]Gorton, G. (1988): “Bank Panics and Business Cycles”, Oxford Economic Papers, 40, 751-781 [30]Haldane, A., Hall, S., Saporta, V., Tanaka,M. (2004): “ ”, Financial Stability Review, Bank of England series [31]Holmstrom, B. and J. Tirole (1998): “Private and Public Supply of Liquidity”, Journal of Political Economy, 106, 1-40 [32]Irwin,G., Saporta, V., Tanaka, M. (2005): “Optimal financial stability policy in a model with heterogenous financial intermediaries”, Bank of England [33]Jacklin, C. (1987) “ Demand Deposits, Trading Restrictions and Risk Sharing”, in Contractual Arrangements for Intertemporal Trade, Prescott, E. and N. Wallace (eds), Minneapolis, University of Minnesota Press [34]Jacklin, C. and S. Bhattacharya (1988): “Distinguishing Panics and Information-based bank runs: Welfare and Policy implications”, Journal of Political Economy, 96(3), 568-592 [35] Kashyap, A.K. and J.C. Stein (1994): “The Impact of Monetary Policy on Bank Balance Sheets”, National Bureau of Economic Research Working Paper No. 4821, Aug 1994 [35]Kaufman, G.G. (1994): “Lender-Of-Last-Resort: A Contemporary Perspective”, Journal,of Financial Services Research, 7, 123-150 [36]Kindleberger, C.P (1978), “Manias, Panics and Crashes: A History of Financial Crises”, London [37]Matutes, C. and X. Vives(1996): “Competition for deposits, fragility and insurance”, Journal of Financial intermediation, 5, 184-216 [38]Morris, S. and H.S.Shin (1998): “Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks”, American Economic Review, 88(3), 597-597 [39 ]Naqvi, H (2004): “Banking crises and the lender of last resort: how crucial is the role of information?”, mimeo, Financial Markets Group, LSE [40]Postlewaite, A. and X.Vives(1987): “Bank runs as an Equilibrium Phenomenon”, Journal of Political Economy, 95(3), 485-491 [41]Rochet, J-C., and J. Tirole (1996): “Interbank Lending and Systemic Risk”, Journal of Money, Credit and Banking, 28(4), 733-762 [42]Rochet, J-C., and X. Vives (2002): “ Coordination Failure and Lender of Last Resort: was Bagehot right after all?”, mimeo [43]Repullo, R. (2003): “Liquidity, Risk Taking and Lender of Last Resort”, mimeo [44]Schnabel, I. and H.S.Shin (2003): “Foreshadowing LTCM: The crisis of 1763”, mimeo [45]Wallace, N. (1988): “Another attempt to explain an illiquid banking system: the Diamond-Dybvig model with sequential service taken seriously”, Quarterly Review of the Ferderal Reserve Bnak of Minneapolis 12(4):3-16 [46] Wallace, N. (1996): “Narrow banking meets the Diamond-Dybvig model”, Quarterly Review of the Federal Reserve Bank of Minneapolis 2091):3-13 [47]Acharya, V. and T. Yorulmazer (2002): “Information Contagion and Inter-Bank Correlation in a Theory of Systemic Risk”, [48] Zhu, H (2001): “Bank runs, welfare and policy implications”, BIS Working papers No. 107
URI:	http://wrap.warwick.ac.uk/id/eprint/1360

Request changes to a record

Actions (login required)

View Item