banking panics information and rational expectations equilibrium this paper shows that bank runs can be modeled as an equilibrium phenomenon we demonstrate that some aspects of the intuitive story that bank runs start with fears of insolvency of banks can be rigorously modeled if individuals observe long lines at the bank they correctly infer that there is a possibility that the bank is about to fail and precipitate a bank run however bank runs occur even when no one has any adverse information extra market constraints such as suspension of convertibility can prevent bank runs and result in superior allocations banking panics were a recurrent phenomenon in the united states until the 1930s they have re emerged as a source of public concern and much theoretical research recently in this paper we provide an information theoretic rationale for bank runs the traditional story is that contagion is an important aspect of bank runs the idea seems to be that when the general public observes large withdrawals from the banking system fears of insolvency grow resulting in even larger withdrawals of deposits in our model some individuals withdraw because they get information that future returns are likely to be low uninformed individuals observing this also have an incentive to liquidate their investments in addition some individuals need to withdraw deposits for other than informationally based reasons thus if the random realization of such a group of individuals is unusually large then the uninformed individuals will be misled and will precipitate a run on the bank the technology is such that a large volume of withdrawals involves liquidation costs consequently runs on the bank do impose social costs a mechanism that may reduce these costs in our model is to suspend convertibility if withdrawals are high however those individuals who need to withdraw their assets for liquidity reasons are worse off ex post our model provides a rationalization for restrictions in demand deposits that were widespread prior to 1929 friedman and schwartz 7 suggest that restrictions of payments ensured

market contagion evidence from the panics of 1854 and 1857 to test a model of contagion where individuals hear some bad news and communicate it to their acquaintances who then pass it on leading to a market panic requires a knowledge of the information networks of participants something hitherto unavailable for two panics in the 1850s this paper examines the behavior of irish depositors in a new york bank as recent immigrants their social network was determined largely by their place of origin in ireland and where they lived in new york during both panics this social network turns out to be the prime determinant of behavior

nonmonetary effects of the financial crisis in propagation of the great depression this paper examines the effects of the financial crisis of the 1930s onthe path of aggregate output during that period our approach is complementary to that of friedman and schwartz who emphasized the monetary impact of the bank failures we focus on non monetary primarily credit related aspects of the financial sector output link and consider the problems of debtors as well as those of the banking system we argue that the financial disruptions of 1930 33 reduced the efficiency of the credit allocation process and that the resulting higher cost and reduced availability of credit acted to depress aggregate demand evidence suggests that effects of this type can help explain the unusual length and depth of the great depression this abstract was borrowed from another version of this item

bank risk taking securitization supervision and low interest rates evidence from the euro area and the u s lending standards using a unique dataset of the euro area and the u s bank lending standards we find that low monetary policy short term interest rates soften standards for household and corporate loans this softening especially for mortgages is amplified by securitization activity weak supervision for bank capital and low monetary policy rates for an extended period conversely low long term interest rates do not soften lending standards finally countries with softer lending standards before the crisis related to negative taylor rule residuals experienced a worse economic performance afterward these results help shed light on the origins of the crisis and have important policy implications the author 2011 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oup com oxford university press

consequences of bank distress during the great depression the consequences of bank distress for the economy during the depression remain an area of unresolved controversy since john m keynes 1931 and irving fisher 1933 macroeconomists have argued that bank distress magnified the extent of the economic decline during the depression as the intermediaries controlling money and credit banks were in a special position to transmit their distress to other sectors but the mechanism through which banking distress mattered for the economy has been hotly contested milton friedman and anna j schwartz 1963 saw the contraction in the money multiplier driven in their view by panicked depositors withdrawals of deposits as the primary mechanism through which banking distress affected the real economy they described the mechanism transmitting banking distress to the real sector as operating at the national level through changes in the aggregate supply of money and interest rates bank distress reduced the money supply available to the public either through the closure of banks and the consequent freezing of bank deposits or the withdrawals of deposits by depositors that feared bank failure ben s bernanke 1983 building on fisher 1933 emphasized the transmission of monetary shocks via their effects on the balance sheets of borrowers and on the supply of credit by banks borrowers balance sheets were worsened by debt deflation as the result of fixed dollar debt obligations borrowers net worth and cash flow declined with the rising value of debt service costs relative to income borrowers with positive net present value projects but weak balance sheets had less internally generated retained earnings to invest and could not qualify for credit furthermore bernanke argued that the contraction of the money supply produced contraction of nominal income and prices relative to fixed debt service which weakened borrowers balance sheets and in turn weakened banks not only did firms financial distress reduce the number of qualified borrowers the contraction in banks net worth forced a reduction in the supply of bank loans to qualified borrowers many firms and individuals relied on banks for credit and as those banks suffered losses of capital due to asset value declines and contractions in deposits as depositors reacted to bank weakness by withdrawing their funds even borrowers with viable projects and strong balance sheets experienced a decrease in the effective supply of loanable funds bernanke termed the combined weakening of borrowers balance sheets and the contraction in bank credit supply a rise in the cost of credit intermediation the scarcity of perfect substitutes for the positive net present value investments of firms with weak balance sheets and for the credit supplied by existing banks implies that the weakening of firms and banks balance sheets the disappearance of banks and the contraction in surviving banks lending made it more difficult for the economy to channel funds to their best use thus what began as a contraction in aggregate demand became a contraction in aggregate supply which magnified adverse economic shocks and prolonged and deepened the depression the financial distress of firms and banks and the decline in bank lending were not only symptoms of the depression but means for magnifying the shocks that caused the depression bernanke s statistical evidence in support of this story is derived from time series analysis at the national level in calomiris graduate school of business 601 uris hall columbia university 3022 broadway new york ny 10027 and national bureau of economic research e mail cc374 columbia edu mason department of finance drexel university 3141 chestnut street philadelphia pa 19104 e mail joe mason drexel edu we thank valerie ramey david wheelock charles himmelberg steve zeldes gary gorton two referees and seminar participants at columbia university wharton northwestern university and the 2001 economic history association meetings for helpful comments on an earlier draft we gratefully acknowledge support from the national science foundation the university of illinois and the federal reserve bank of st louis

interbank networks in prewar japan structure and implications forthcoming as interbank networks in prewar japan structure and implications with michiru sawada industrial and corporate change 2011

financial shocks and corporate investment in emerging markets we examine how cross firm and cross country heterogeneity shapes the responses of corporate investment in emerging markets to changes in u s monetary policy and financial market volatility the latter proxying for uncertainty we find that in response to increases in u s monetary policy rates or financial market volatility financially weaker firms reduce investment by more than financially strong firms we also show that firms with stronger balance sheets delay investment voluntarily when faced with higher uncertainty finally we find that stronger macroeconomic fundamentals lower public debt or higher international reserves help to buffer corporate investment from increases in u s monetary policy rates

understanding bank runs the importance of depositor bank relationships and networks we use a unique new database to examine micro depositor level data for a bank that faced a run we use minute by minute depositor withdrawal data to understand the effectiveness of deposit insurance the role of social networks and the importance of bank depositor relationships in influencing depositor propensity to run we employ methods from the epidemiology literature which examine how diseases spread to estimate transmission probabilities of depositors running and the significant underlying factors we find that deposit insurance is only partially effective in preventing bank runs further our results suggest that social network effects are important but are mitigated by other factors in particular the length and depth of the bank depositor relationship depositors with longer relationships and those who have availed of loans from a bank are less likely to run during a crisis suggesting that cross selling acts not just as a revenue generator but also as a complementary insurance mechanism for the bank finally we find there are long term effects of a solvent bank run in that depositors who run do not return back to the bank our results help understand the underlying dynamics of bank runs and hold important policy implications

financial contagion through capital connections a model of the origin and spread of bank panics financial contagion is modeled as an equilibrium phenomenon in a dynamic setting with incomplete information and multiple banks the equilibrium probability of bank failure is uniquely determined we explore how the cross holding of deposits motivated by imperfectly correlated regional liquidity shocks can lead to contagious eects conditional on the failure of a financial institution we show that contagion is possible in the unique equilibrium of the economy and characterize exactly when it may exist at the same time we identify a direction of flow for contagious eects which provides a rationale for localized financial panics simulations identify the optimal level of interbank deposit holdings in the presence of contagion risk our results suggest that when the probability of bank failure is low maximal levels of interbank holdings are optimal when cross holding of deposits is complete we demonstrate that the intensity of contagion is increasing in the size of regionally aggregate liquidity shocks

a model of military spending and economic growth this paper investigates a model of militaryconflict between two regimes in which eachmay initiate combat in order to confiscateresources from the other conflict or thepotential for same results in wastefulmilitary spending which lowers growth foreach regime equilibrium military spendingis determined in a one shot game analysisof the one shot game is followed by a studyof the prospects for an equilibrium inwhich regimes lower military spending anddo not engage in combat in repeated play in this latter case military spending willbe decreased to a level just sufficient todeter deviations from the no combatequilibrium this minimum level increases and growth decreases with the internalpolitical instability of each regime moreover an exogenous increase in thedefensive capability of each regime mayeither increase or decrease growth depending upon the initial level ofmilitary spending and growth

management ownership and market valuation an empirical analysis we investigate the relationship between management ownership and market valuation of the firm as measured by tobin s q in a 1980 cross section of 371 fortune 500 firms we find evidence of a significant nonmonotonic relationship tobin s q first increases then declines and finally rises slightly as ownership by the board of directors rises for older firms there is evidence that q is lower when the firm is run by a member of the founding family than when it is run by an officer unrelated to the founder

a critical review of contagion risk in banking the recent financial crisis has focused the attention of scholars and policymakers on how to improve financial stability through better macro prudential regulation and supervision in this paper we compare the existing theoretical and empirical literature on contagion through the banking system it is argued that the structure of the interbank market the size of banks the linkages among them the level of correlation of their investments and the transparency of the regulator are key factors in determining the possibility of contagion we discuss the different findings and present avenues for future research

competitive consequences of interfirm collaboration how joint ventures shape industry profitability recent international business research on international joint ventures focuses on how firms can use such ventures for knowledge access and learning to enhance their competitiveness thereby increasing competition in the industry by contrast research in industrial organization economics has observed that firms can also use joint ventures in various ways to attenuate competition in this paper we join these two streams of research to investigate the conditions under which joint ventures reduce or enhance competition by empirically testing the effects of different types of joint ventures on industry profitability our results suggest that joint ventures can be pro competitive or anti competitive depending on whether or not they are formed between competing firms represent foreign market entry and operate in relatively concentrated industries our paper shows the importance of adopting a contingent approach to evaluating the competitive implications of joint ventures and it also points to the value of reinvigorating international business research on the competitive context and consequences of interfirm collaboration

distance constraints the limits of foreign lending in poor economies how far does mobility of multinational banks solve problems of financial development using a panel of 80 000 loans over 7 years i show that greater cultural and geographical distance between a foreign bank s headquarters and local branches leads it to further avoid lending to informationally difficult yet fundamentally sound firms requiring relational contracting greater distance also makes them less likely to bilaterally renegotiate and less successful at recovering defaults differences in bank size legal institutions risk preferences or unobserved borrower heterogeneity cannot explain these results these distance constraints can be large enough to permanently exclude certain sectors of the economy from financing by foreign banks

do depositors punish banks for bad behavior market discipline deposit insurance and banking crises this paper empirically investigates two issues largely unexplored by the literature on market discipline we evaluate the interaction between market discipline and deposit insurance and the impact of banking crises on market discipline we focus on the experiences of argentina chile and mexico during the 1980s and 1990s we find that depositors discipline banks by withdrawing deposits and by requiring higher interest rates deposit insurance does not appear to diminish the extent of market discipline aggregate shocks affect deposits and interest rates during crises regardless of bank fundamentals and investors responsiveness to bank risk taking increases in the aftermath of crises

the effect of strategic alliances on firm productivity in south korea using a rich firm level data set from south korea this article analyses the impact of strategic alliances on firm performance focusing on how firm productivity is affected by alliance types such as joint venture joint technical development technical alliance joint marketing and coproduction as well as alliance structures such as intra and inter industry alliances total factor productivity tfp is estimated through the semi parametric method suggested by levinsohn and petrin 2003 in addition a two stage least squares 2sls method is applied to reduce the potential endogenous problem between productivity and strategic alliance choices the empirical results found in this article indicate that the engagement in joint ventures positively affects firm productivity and that the formation of international intra industry alliances has a positive impact on firm productivity

fundamentals panics and bank distress during the depression we assemble bank level and other data for fed member banks to model determinants of bank failure fundamentals explain bank failure risk well the first two friedman schwartz crises are not associated with positive unexplained residual failure risk or increased importance of bank illiquidity for forecasting failure the third friedman schwartz crisis is more ambiguous but increased residual failure risk is small in the aggregate the final crisis early 1933 saw a large unexplained increase in bank failure risk local contagion and illiquidity may have played a role in pre 1933 bank failures even though those effects were not large in their aggregate impact

uncertain liquidity and interbank contracting we study a version of the diamond and dybvig journal of political economy 1983 91 401 419 model where banks would like to obtain insurance against shocks on returns on liquid assets through an interbank borrowing and lending program we show that if investments in liquid assets and their realized returns are private information to individual banks the first best allocation is not incentive compatible we then characterize the second best interbank contract

evaluating theories of bank runs with heterogeneity restrictions this paper empirically tests theories of bank runs we use a structural panel var to extract runs from deposit market data identification exploits cross sectional heterogeneity in deposit insurance we identify bank runs as adverse deposit market supply shocks hitting uninsured banks harder compared to insured conditional on a run we study the behavior of uninsured banks with bad and good fundamentals we find that both experience runs but deposit outflows at the former are more severe panic effects which affect all uninsured deposits alike irrespective of fundamentals dominate in the aggregate insured banks partially absorb the outflow of uninsured deposits

the evolution of a financial crisis collapse of the asset backed commercial paper market this paper documents runs on asset backed commercial paper abcp programs in 2007 we find that one third of programs experienced a run within weeks of the onset of the abcp crisis and that runs as well as yields and maturities for new issues were related to program level and macro financial risks these findings are consistent with the asymmetric information framework used to explain banking panics have implications for commercial paper investors degree of risk intolerance and inform empirical predictions of recent papers on dynamic coordination failures

estimating bilateral exposures in the german interbank market is there a danger of contagion abstract credit risk associated with interbank lending may lead to domino effects where the failure of one bank results in the failure of other banks not directly affected by the initial shock recent work in economic theory shows that this risk of contagion depends on the precise pattern of interbank linkages we use balance sheet information to estimate a matrix of bilateral credit relationships for the german banking system and test whether the breakdown of a single bank can lead to contagion we find that in the absence of a safety net there is considerable scope for contagion that could affect a large proportion of the banking system the financial safety net in this case institutional guarantees for saving banks and cooperative banks considerably reduces but does not eliminate the danger of contagion even so the failure of a single bank could lead to the breakdown of up to 15 of the banking system in terms of assets

production networks and economic policy in this paper we show how to combine data on input output tables and recent insights from the theory of production networks in order to inform policy we first describe the information contained in input output tables compiled by statistical agencies and show how to derive relevant statistics of production networks we then discuss the implications of production networks for policy intervention in a series of domains such as fiscal policy industrial policy or finance finally we present a quantitative exercise applied to french data in order to illustrate that production networks shape the overall impact of competition policy on the economy

distinguishing panics and information based bank runs welfare and policy implications in this paper we contrast panics and information based bank runs in an effort to provide a robust and empirically plausible model of how bank runs are triggered the model of information based runs is characterized by two sided asymmetric information the bank cannot observe the true liquidity needs of the depositors while depositors are asymmetrically informed about bank asset quality we also examine the relative degrees of risk sharing provided by bank deposit contracts and traded equity contracts we show that the choice of deposit or equity depends on the attributes of and information about the underlying investment returns

the interbank market during a crisis abstract the autumn of 1998 provides a setting in which to test the performance of the interbank market during a potential financial crisis this period witnessed russia s effective default on its sovereign bonds and the near collapse of the hedge fund long term capital management despite these negative shocks to bank capital and increased uncertainty in financial markets the federal funds market still effectively channeled liquidity to those institutions in need at rates consistent with federal reserve intentions further risk premiums on overnight lending were largely unaffected and lending volumes increased suggesting that the federal funds market performed well during this period

strategic information revelation we analyze the problem in which agents have non public information and are to play an asymmetric information game the agents may reveal some or all of their information to other agents prior to playing this game revelation is via exogenously specified certifiable statements the equilibria resulting from various revelation strategies are used to determine equilibrium revelation of information sufficient conditions are provided for complete revelation of all private information a number of examples are provided illustrating when revelation will or will not occur in commonly analyzed games many economic problems are characterized by the presence of both strategic behaviour on the part of individuals and by asymmetric information models encompassing both of these characteristics have been used successfully to examine questions in many fields usually using the concept of bayesian nash equilibrium as the solution concept typically the agents information is given exogenously and is fixed throughout the analysis modelling the information structure as static is appropriate for some problems but not for all in particular situations that are inherently dynamic most economic encounters allow for some interchange between the agents before the outcome is settled irrevocably in such circumstances it is possible that at least one or more of the agents possessing non public information may be able to reveal part or all of his information to one or all of the other agents in the economy during the course of their contact to the extent that such a communication is believed by the other agents the priors of the other agents will change and we will have what is in essence a new asymmetric information game new in

additional evidence on the information based contagion effects of bank failures abstract recent theoretical models addressed the question of the nature of bank runs and what triggers them two competing hypotheses emerged pure panic and information based contagion this study provides additional evidence consistent with the latter hypothesis three observable bank characteristics are examined as proxy measures for the interim private information used by rational depositors in assessing the riskiness of a bank s long lived assets that may trigger bank runs the three factors are 1 the distance of the solvent banks headquarters from the headquarters of each failed bank 2 the size of the solvent banks and 3 the capital ratio as a proxy for their solvency the analysis is conducted in the context of the five large bank failures that occurred in the southwest region of the us during the mid 1980s weekly abnormal returns of 33 southwestern bhcs in ten critical failure related event dates are regressed on the three observable bank characteristics our findings suggest that distance and capital adequacy are negatively related to the magnitude of the contagion effect whereas size is positively related

on crises contagion and confusion abstract since the tequila crisis of 1994 1995 the asian flu of 1997 and the russian virus of 1998 economists have been busy producing research on the subject of contagion yet few studies have examined empirically through which channels the disturbances are transmitted if there are indeed fundamental reasons for the spillovers we observe we attempt to fill this gap by analyzing how both trade links and the largely ignored financial sector links influence the pattern of fundamentals based contagion we examine the role of international bank lending the potential for cross market hedging and bilateral and third party trade in the propagation of crises

an experiment on the causes of bank run contagions abstract to understand the mechanisms behind bank run contagions we conduct bank run experiments in a modified diamond dybvig setup with two banks left and right the banks liquidity levels are either linked or independent left bank depositors see their bank s liquidity level before deciding right bank depositors only see left bank withdrawals before deciding we find that left bank depositors actions significantly affect right bank depositors behavior even when liquidities are independent furthermore a panic may be a one way street an increase in left bank withdrawals can cause a panic run on the right bank but a decrease does not calm depositors

local banking panics of the 1920s identification and determinants abstract using a newly discovered dataset of u s bank suspensions from 1921 to 1929 we discovered that banking panics were more common in the 1920s than had been believed besides identifying panics we investigate their determinants finding that local banking panics were more likely when fundamental economic conditions were generally weak and more likely in overbanked states they were less likely in states with deposit insurance or states where a relatively large share of banks belonged to chain banking organizations

optimal financial crises empirical evidence suggests that banking panics are related to the business cycle and are not simply the result of sunspots panics occur when depositors perceive that the returns on bank assets are going to be unusually low we develop a simple model of this in this setting bank runs can be first best efficient they allow efficient risk sharing between early and late withdrawing depositors and they allow banks to hold efficient portfolios however if costly runs or markets for risky assets are introduced central bank intervention of the right kind can lead to a pareto improvement in welfare from the earliest times banks have been plagued by the problem of bank runs in which many or all of the bank s depositors attempt to withdraw their funds simultaneously because banks issue liquid liabilities in the form of deposit contracts but invest in illiquid assets in the form of loans they are vulnerable to runs that can lead to closure and liquidation a financial crisis or banking panic occurs when depositors at many or all of the banks in a region or a country attempt to withdraw their funds simultaneously prior to the twentieth century banking panics occurred frequently in europe and the united states panics were generally regarded as a bad thing and the development of central banks to eliminate panics and ensure financial stability has been an important feature of the history of financial systems it has been a long and involved process the first cerntral bank the bank of sweden was established more than 300 years ago the bank of england played an especially important role in the development of effective stabilization policies in the eighteenth and nineteenth centuries by the end of the nineteenth century banking panics had been eliminated in europe the last true panic in england was the overend gurney company crisis of 1866

bank run psychology abstract banks are inherently susceptible to panics and bank runs due to the problem of maturity mismatch resulting in both a stable equilibrium in which the bank survives and an unstable equilibrium in which a bank run occurs understanding equilibrium selection in this setting is extremely important for safeguarding financial stability in this paper one new potential factor that determines whether a bank runs gets triggered or not is experimentally studied namely the psychological state of the depositor prior to participating in an experimental bank run game subjects are either induced with fear sadness or happiness using an autobiographical emotion induction task the findings suggest that the presence of background fear significantly increases the likelihood of withdrawal and a subsequent bank run in addition women are shown to be significantly more likely to withdraw then men but only in the fear induction treatment

impacts of domestic joint ventures on industrial rates of return a pooled cross section analysis 1964 1975 empirical evidence on the relations among diversification concentration and profitability is inconclusive on whether any relation exists in this note changes in diversification and concentration in u s manufacturing industries are examined over the period 1963 72 when a major expansion in diversification took place the zero order correlations between changes in concentration and in diversification either out of or into an industry tend to be positive and significant the relation becomes insignificant when other variables especially market growth are controlled however a positive relation between changes in concentration and inbound diversification does remain significant among the less concentrated industries where it seems more likely to reflect real economies enjoyed by diversifying companies than the exercise of market power

survive another day using changes in the composition of investments to measure the cost of credit constraints abstract we introduce a novel empirical strategy to measure the size of credit shocks theoretically we show that credit shocks reduce the value of long term relative to short term investments empirically we can therefore compare the reduction of long term relative to short term investments within firms allowing for firm times year fixed effects using spanish firm level data we estimate the credit crunch to be equivalent to an additional tax rate of around 11 on the longest lived capital to pin down credit constraints as the underlying cause we apply triple differences strategies using foreign ownership or precrisis debt maturity

the information sensitivity of debt in good and bad times abstract we empirically show the dynamics of information production and information sensitivity of bank debt around the great recession as more precise information is produced at the onset of the crisis bank debt becomes informationally sensitive along two separate dimensions first precise information amplifies the effect of market expectations on default risk second for banks that are already expected to perform poorly more precise information further increases default risk both effects are muted in good times overall our findings are consistent with information based models of financial crises

contagious bank failures in a free banking system this paper develops a model of an unregulated banking system based around a private clearing house arrangement whilst such a system may dominate one with a public safety net in reducing moral hazard in lending and therefore the scope for individual bank insolvency it also increases the likelihood of contagious bank failures following a systemic shock or an aggregate liquidity shortage

the role of demandable debt in structuring optimal banking arrangements demandable debt finance by banks warrants explanation because it entails costs of bank suspension liquidation and idle reserve holdings an explanation is developed in which demandable debt provides incentive compatible intermediation where the banker has comparative advantage in allocating investment funds but may act against the interests of uninformed depositors demandable debt attracts funds by giving depositors an option to force liquidation its usefulness in transacting follows from information sharing between monitors and nonmonitors copyright 1991 by american economic association

bank runs and currency run in a system without a safety net argentina and the tequila shock abstract this paper tests the random withdrawals vs informed based theories of bank runs in the context of the bank panic that took place in argentina as a consequence of the mexican devaluation of december 20 1994 this evidence is unique in several ways it is the case of a contemporary banking system with virtually no explicit safety net a currency board with no deposit insurance scheme and a case in which the bank runs were triggered by a currency run the findings of the paper provide support to the informed based theories and show that depositors are concerned with the impact of a currency run on bank solvency

u s banks crises and bailouts from mexico to ltcm this paper investigates the impact on bank stock prices of emerging market currency crises and bailouts the stock market distinguishes between banks with exposure to a crisis country and other banks in general banks with exposures to a crisis country are affected adversely by currency events and positively by bailouts other banks are mostly unaffected by events in countries experiencing a crisis the paper uses the impact of the ltcm crisis on bank stock prices to put the emerging market events in perspective the ltcm crisis had no significant contagion effects in the banking sector either but banks that participated in the ltcm rescue experienced negative stock returns when the rescue was announced this abstract was borrowed from another version of this item

interbank liquidity crunch and the firm credit crunch evidence from the 2007 2009 crisis we study the credit supply effects of the unexpected freeze of the european interbank market using exhaustive portuguese loan level data we find that banks that rely more on interbank borrowing before the crisis decrease their credit supply more during the crisis the credit supply reduction is stronger for firms that are smaller with weaker banking relationships small firms cannot compensate the credit crunch with other sources of debt furthermore the impact of illiquidity on the credit crunch is stronger for less solvent banks finally we find no overall positive effects of central bank liquidity but instead higher hoarding of liquidity

liquidity coinsurance moral hazard and financial contagion we study the propagation of financial crises between regions characterized by moral hazard problems the source of the problem is that banks are protected by limited liability and may engage in excessive risk taking the regions are affected by negatively correlated liquidity shocks so that liquidity coinsurance is pareto improving the moral hazard problem can be solved if banks are sufficiently capitalized under autarky a limited investment is needed to achieve optimality so that a limited amount of capital is sufficient to prevent risk taking with interbank deposits the optimal investment increases and capital becomes insufficient to prevent excessive risk taking thus bankruptcy occurs with positive probability and the crises spread to other regions via the financial linkages opening the financial markets is nevertheless pareto improving consumers benefit from liquidity coinsurance although they pay the cost of excessive risk taking finally we show that in this framework a completely connected deposit structure is more conducive to financial crises than an incompletely connected structure

bank capital interbank contagion and bailout policy abstract this paper develops a theoretical framework in which asset linkages in a syndicated loan agreement can infect a healthy bank when its partner bank fails we investigate how capital constraints affect the choice of the healthy bank to takeover or liquidate the exposure held jointly with the failing bank and how the bank s ex ante optimal capital holding and possibility of contagion are affected by anticipation of bail out policy capital requirements and the joint exposure we identify a range of factors that strengthen or weaken the possibility of contagion and bailout recapitalization with common stock rather than preferred equity injection dilutes existing shareholder interests and gives the bank a greater incentive to hold capital to cope with potential contagion increasing the minimum regulatory capital does not necessarily reduce contagion while the requirement of holding conservation capital buffer could increase the bank s resilience to avoid contagion

coordination failures and the lender of last resort was bagehot right after all the classical doctrine of the lender of last resort lolr elaborated by bagehot 1873 asserts that the central bank should lend to illiquid but solvent banks under certain conditions several authors have argued that this view is now obsolete in modern interbank markets a solvent bank cannot be illiquid this paper provides a possible theoretical foundation for rescuing bagehot s view our theory does not rely on the multiplicity of equilibria that arises in classical models of bank runs we built a model of banks liquidity crises that possesses a unique bayesian equilibrium in this equilibrium there is a positive probability that a solvent bank cannot find liquidity assistance in the market we derive policy implications about banking regulation solvency and liquidity ratios and interventions of the lender of last resort furthermore we find that public bailout and private bail in involvement are complementary in implementing the incentive efficient solution and that bagehot s lender of last resort facility must work together with institutions providing prompt corrective action and orderly failure resolution finally we derive similar implications for an international lender of last resort ilolr jel g21 g28

financial networks contagion commitment and private sector bailouts i develop a model of financial networks in which linkages not only spread contagion but also induce private sector bailouts where liquid banks bail out illiquid banks because of the threat of contagion introducing this bailout possibility i show that linkages may be optimal ex ante because they allow banks to obtain some mutual insurance even though formal commitments are impossible however in some cases e g when liquidity is concentrated among a small group of banks the whole network may collapse i also characterize the optimal network size and apply the results to joint liability arrangements and payment systems linkages among agents in financial markets are a concern because of the risk of financial contagion that is the risk that a small shock to one agent will spread to other agents in a domino effect whether we should worry about these linkages is an open question the main goal of this paper is to show that a network in which agents are closely interlinked may be optimal both because of and despite the potential for contagion another goal is to characterize optimal networks that is whether and how agents should be linked to one another the basic intuition is as follows linkages present the threat of contagion to prevent collapse of the whole network agents who are lucky ex post may be willing to bail out those who are not in this way agents obtain the benefits of mutual insurance even though they cannot precommit to making payments

reprint of stopping contagion with bailouts micro evidence from pennsylvania bank networks during the panic of 1884 abstract using a newly constructed historical dataset on the pennsylvania state banking system detailing the amounts of due froms on a debtor bank by debtor bank basis we investigate the effects of the panic of 1884 and subsequent private sector orchestrated bailout of systemically important banks sibs on the broader banking sector we find evidence that pennsylvania banks with larger direct interbank exposures to new york city changed the composition of their asset holdings shifting from loans to more liquid assets and reducing their new york city correspondent deposits in the near term over the long term though only the lower correspondent deposits effect persisted our findings show that the banking turmoil in new york city impacted more exposed interior banks but that bailouts of sibs by the new york clearing house likely short circuited a full scale banking panic

liquidity shortages and banking crises we show in this article that bank failures can be contagious unlike earlier work where contagion stems from depositor panics or contractual links between banks we argue that bank failures can shrink the common pool of liquidity creating or exacerbating aggregate liquidity shortages this could lead to a contagion of failures and a total meltdown of the system given the costs of a meltdown there is a possible role for government intervention unfortunately liquidity and solvency problems interact and can cause each other making it hard to determine the cause of a crisis we propose a robust sequence of intervention banks are often found at the center of systemic financial crises the causes of these crises have long been debated do they stem from depositor panics or do they arise because bank balance sheets are exposed to common factors if it is the latter then is there any sense in which bank failures can be contagious can anything be done to prevent these crises or stop them from propagating once they begin our purpose in this paper is to reexamine whether bank failures can start and propagate systemic crises even if we assume that depositors do not panic that is even if depositors actions are coordinated and they do not run simply because they fear others will run our focus is not because we think that panics are empirically unimportant the jury is still out on that instead we show that contagion can stem from an underlying real general equilibrium problem rather than just from lack of coordination among depositors from a policy perspective attempts to reassure investors through confidence building measures will not work if panic and lack of coordination are not the reasons for a crisis we begin in this paper with a model of a bank that we developed in diamond and rajan 2001 assets in this model are illiquid they cannot be borrowed against or sold for the full value of resources they will generate in their best use because the human capital necessary to generate that full value cannot

contagion and bank failures during the great depression the june 1932 chicago banking panic the authors examine the social costs of asymmetric information induced bank panics in an environment without government deposit insurance their case study is the chicago bank panic of june 1932 the authors compare the ex ante characteristics of panic failures and panic survivors despite temporary confusion about bank asset quality on the part of depositors during the panic which was associated with widespread depositor runs and bank stock price declines the panic did not produce significant social costs in terms of failures among solvent banks copyright 1997 by american economic association

interbank lending and systemic risk systemic risk refers to the propagation of a bank s economic distress to other economic agents linked to that bank through financial transactions banking authorities often prevent systemic risk through an implicit insurance of interbank claims or by reducing interbank transactions and centralizing banks liquidity management this paper investigates whether the flexability afforded by decentralized bank interactions can be preserved while protecting the central banks from the necessity of conducting undesired rescue operations it develops a model in which decentralized interbank leading is motivated by peer monitoring in this context the paper derives the optimal prudential rules and in particular looks at the impact of interbank monitoring on the solvency and liquidity ratios of borrowing and lending banks last it provides conditions which a too big to fail policy is or is not justified and studies the possibility of propagation of a bank s liquidity shock throughout the financial system copyright 1996 by ohio state university press

financial crises payment system problems and discount window lending in a developed economy financial crises are rapidly conveyed to the payment system which tends to rely on private credit extensions in most countries while many authors recommend that the central bank do no more than provide adequate aggregate liquidity during a crisis this policy requires well functioning private credit markets to channel liquidity to solvent but illiquid firms this paper presents a model of private lending which defines a crisis as a time when lenders become uncertain about how to assess financial risks and therefore rationally withdraw from making new loans in such an environment a government lender of last resort can improve social welfare copyright 1996 by ohio state university press

failure and rescue in an interbank network this paper is concerned with systemic risk in an interbank market modelled as a directed graph of interbank obligations this builds on the modelling paradigm of eisenberg and noe eisenberg l noe th 2001 systemic risk in financial systems management sci 472 236 249 by introducing costs of default if loans have to be called in by a failing bank this immediately introduces novel and realistic effects we find that in general many different clearing vectors can arise among which there is a greatest clearing vector arrived at by letting banks fail in succession until only solvent banks remain such a collapse should be prevented if at all possible we then study situations in which consortia of banks may have the means and incentives to rescue failing banks this again departs from the conclusions of the earlier work of eisenberg and noe where in the absence of default losses there would be no incentive for solvent banks to rescue failing banks we conclude with some remarks about how a rescue consortium might be constructed this paper was accepted by wei xiong finance

strategic loan defaults and coordination an experimental analysis this paper experimentally studies the impact of bank and borrower fundamentals on loan repayment we find that solvent borrowers are more likely to default strategically when the bank s expected strength is low although loan repayment is a pareto dominant nash equilibrium borrowers are also less likely to repay when other borrowers expected repayment capacity is low regardless of banks fundamentals we show that changes in expectations about bank and borrower fundamentals change the risk dominance properties of the borrowers coordination problem and that these changes subsequently explain strategic defaults for the individual borrower loss aversion and negative past experiences reduce repayment suggesting that bank failure can be contagious in times of distress

interbank contagion at work evidence from a natural experiment this article tests financial contagion due to interbank linkages for identification we exploit an idiosyncratic sudden shock caused by a large bank failure in conjunction with detailed data on interbank exposures first we find robust evidence that higher interbank exposure to the failed bank leads to large deposit withdrawals second the magnitude of contagion is higher for banks with weaker fundamentals third interbank linkages among surviving banks further propagate the shock finally we find results suggesting that there are real economic effects these results suggest that interbank linkages act as an important channel of contagion and hold important policy implications jel g01 g21 g28 e58 since the onset of the financial turmoil increased uncertainty reflected particularly in counterparty risk has led banks to hoard liquidity this has resulted in a significant decline of trading in the interbank money markets jean claude trichet president of the european central bank december 2008

networked relationships in the e mid interbank market a trading model with memory interbank markets are fundamental for bank liquidity management in this paper we introduce a model of interbank trading with memory our model reproduces features of preferential trading patterns in the e mid market recently empirically observed through the method of statistically validated networks the memory mechanism is used to introduce a proxy of trust in the model the key idea is that a lender having lent many times to a borrower in the past is more likely to lend to that borrower again in the future than to other borrowers with which the lender has never or has in frequently interacted the core of the model depends on only one parameter representing the initial attractiveness of all the banks as borrowers model outcomes and real data are compared through a variety of measures that describe the structure and properties of trading networks including number of statistically validated links bidirectional links and 3 motifs refinements of the pairing method are also proposed in order to capture finite memory and reciprocity in the model the model is implemented within the mason framework in java

contagion across us and european financial markets evidence from the cds markets abstract this study investigates whether contagion occurred during the recent global financial crisis across european and us financial markets the methodologies used to test for contagion are based on changes in correlation coskewness cokurtosis and covolatility these tests are applied to a set of bank sector cds insurance sector cds sovereign bonds equity and volatility indices the findings indicate significant evidence of contagion especially through the channels of higher order moments