Youdell, Paul (2013) The inefficiency of bank modules as a containment response to financial contagion : a benchmark result derived using a partition approach. PhD thesis, University of Warwick.

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Abstract

Following the recent international financial crisis, a number of policy proposals
have been made: one of which is the partitioning of banks into modules (groups),
to contain financial shocks. The firewalls, which surround modules, prevent financial
contagion: when a shock hits a bank it spreads to other banks in the
same module, but not to banks in other modules. Conditional on bank modules
avoiding shocks, businesses can achieve their latent business opportunities. The
optimal banking system has a cost-benefit trade off: increased module size allows
for more lucrative business opportunities, but increases systemic banking risk.
This thesis, using a theoretical approach, assesses the importance of the distribution
of business opportunities when using modules. When the distribution is
uniform, the optimal structure of the banking industry is fully characterised: it
surprisingly takes only two forms, either one all-encompassing module (containing
all the banks), or atomistic modules (each module contains only one bank).
The intuition behind this sharp characterisation is the increasing marginal returns
that modules have on social welfare. A counter-example is constructed
where, with a non-uniform matching of business opportunities, conversely, the
efficient solution does have multiple modules each containing multiple banks.
The model’s policy recommendation is that the banking system needs to be
designed in accordance with the financial requirements of businesses.

Item Type:	Thesis or Dissertation (PhD)
Subjects:	H Social Sciences > HB Economic Theory H Social Sciences > HG Finance Q Science > QA Mathematics
Library of Congress Subject Headings (LCSH):	Financial crises -- Econometric models, Financial institutions -- Law and legislation, Economic stabilization, Markov processes
Official Date:	November 2013
Institution:	University of Warwick
Theses Department:	Department of Economics
Thesis Type:	PhD
Publication Status:	Unpublished
Supervisor(s)/Advisor:	Ghosal, Sayantan; MacKay, Robert S., 1956-
Sponsors:	Economic and Social Research Council (Great Britain) (ESRC); University of Warwick. Department of Economics
Extent:	298 leaves
Language:	eng
URI:	http://wrap.warwick.ac.uk/id/eprint/59083

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