The Library

Bank fragility and growth expectations

Tools

Proto, Eugenio. (2007) Bank fragility and growth expectations. BE Journal of Economic Analysis & Policy, Vol.7 (No.1). Article 55. ISSN 1935-1682

Preview

PDF
WRAP_Proto_Bank_fragility.pdf - Requires a PDF viewer such as GSview, Xpdf or Adobe Acrobat Reader
Download (424Kb)

Official URL: http://dx.doi.org/10.2202/1935-1682.1720

Abstract

Banks supply liquidity to insure individuals against possible short-term consumption shocks. The higher this level of illiquidity insurance the lower the investments in long run assets, and the higher the risk of a bank run generated by a real negative shock. If individuals are sufficiently risk averse, competitive banks trade off liquidity insurance for portfolio risk. High growth expectations, typical of emerging economies, increase the optimal liquidity supply even when this increases the risk of a bank run. On the contrary, deposit contracts offered when economic performances are very uncertain (like in less developed economies), and where output fluctuations are milder (like in developed economies), are less exposed to the risk of a bank run. In this setting, a bail-out in case of crisis is ex-ante Pareto efficient even if it always increases the risk of crisis.

Item Type:

Journal Article

Subjects:

H Social Sciences > HG Finance

Divisions:

Faculty of Social Sciences > Economics

Library of Congress Subject Headings (LCSH):

Banks and banking, International, Development economics, Risk, Rational expectations (Economic theory), Bank insurance

Journal or Publication Title:

BE Journal of Economic Analysis & Policy

Publisher:

Berkeley Electronic Press

ISSN:

1935-1682

Official Date:

5 November 2007

Dates:

Date	Event
5 November 2007	Published

Volume:

Vol.7

Number:

No.1

Page Range:

Article 55

Identification Number:

10.2202/1935-1682.1720

Status:

Peer Reviewed

Access rights to Published version:

Open Access

Funder:

Suomen Pankki. Siirtymätalouksien tutkimuslaitos [Bank of Finland Institute for Economies in Transition] (SPST)

References:

[1] Allen, F., and D. Gale (1998), �Optimal Financial Crises,�Journal of Finance, vol. 53, no. 4.
[2] Calomiris, C., and G. Gorton (1991), �The Origin of Banking Panics: Models, Facts and Bank Regulation,�in Hubbard, G. R. (ed.), Financial Markets and Financial Crises, Univ. of Chicago Press, 109-173.
[3] Caprio, G., and D. Kingebiel (1996a), �Bank Insolvencies: A Cross-Country Experience,�World Bank WP 1620.
[4] Caprio, Gerard, Jr. and Daniela Klingebiel (1996b), �Bank Insolvency: Bad Luck, Bad Policy, or Bad Banking?�Paper presented to the Annual World Bank Conference on Development Economics, Washington, D.C.:
The World Bank (April).
[5] Chang, R., and A. Velasco (1998), �Financial Crises in Emerging Markets: A Canonical Model,�NBER WP no. 6606.
[6] Corsetti, G., P. Pesenti, and N. Roubini (1999), �Paper tigers? A model of the Asian crisis.�European Economic Review 43, 1211�1236.
[7] Demirguç-Kunt, A., and E. Detragiache (1998), �The Determinants of Banking Crises in Developing and Developed Countries,�IMF sta¤ paper 45 no. 1.
[8] Demirguç-Kunt, A., and E. Detragiache (2002), �Does deposit insurance increase banking system stability? An empirical investigation,�Journal of Monetary Economics, 49: 1373-1406.
[9] Diamond, D., and P. Dybvig (1983), �Bank Runs, Deposit Insurance, and Liquidity,�Journal of Political Economy, 91: 401-419.
[10] Eichengreen, B., and C. Arteta (2000), �Banking Crisis in Emerging Markets: Presumptions and Evidence,�mimeo, University of California, Berkeley.
[11] Femminis, G. and Ruggerone, L. (2004), �Bailouts and Bank Runs in a Model of Crony Capitalism,�The B.E. Journal of Macroeconomics: Vol. 4: Iss. 1 (Contributions), Article 11.
[12] Freixas, X., and Rochet, J-C. (1999), Microeconomics of Banking, MIT Press, Cambridge Mass.
[13] Furman, J., and J. E. Stiglitz (1998), �Economic Crises: Evidence and Insight from East Asia,�Brookings Papers in Economic Activity, 2.
[14] Goldstain, T., and A. Pauzner, �Demand Deposit Contracts and the Probability of Bank Runs,�forthcoming, Journal of Finance.
[15] Gorton, G. (1988), �Banking Panics and Business Cycle,�Oxford Economic Papers 40: 751-781.
[16] Gorton, G., and A. Winton (2002), �Financial Intermediation,�NBER WE no. 8928.
[17] Green, E. J., and P. Lin (2000), �Diamond and Dybvig�s classic theory of �nancial intermediation: What�s missing?�Quarterly Review 24, Federal Reserve Bank of Minneapolis, 3-13.
[18] Jacklin, C.J., and S. Bhattacharya (1988), �Distinguishing Panics and Information-Based Bank Runs: Welfare and Policy Implications,�Journal of Political Economy, 96: 568-92.