IMF Working Papers

Financial Institutions, Financial Contagion, and Financial Crises

By Haizhou Huang, Chenggang Xu

May 1, 2000

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Haizhou Huang, and Chenggang Xu. Financial Institutions, Financial Contagion, and Financial Crises, (USA: International Monetary Fund, 2000) accessed November 21, 2024
Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Financial crises are endogenized through corporate and interbank market institutions. Single-bank financing leads to a pooling equilibrium in the interbank market. With private information about one’s own solvency, the best illiquid banks will not borrow but rather will liquidate some premature assets. The withdrawals of the best banks from the interbank market may lead more solvent but illiquid banks to withdraw from the market, until the interbank market collapses. However, multi-bank financing leads to a separating equilibrium in the interbank market. Thus, bank runs are limited to illiquid and insolvent banks, and idiosyncratic shocks never trigger a contagious bank run.

Subject: Asset and liability management, Bank solvency, Banking, Financial crises, Financial markets, Financial sector policy and analysis, Interbank markets, Labor, Liquidity, Self-employment

Keywords: Bank solvency, Borrowing cost, Central bank, East Asia, Expected return, Financial contagion, Financial crises, Financial crisis, Financial institutions, Illiquid bank, Interbank market, Interbank market market failure, Interbank markets, Liquidity, Private benefit, SBC economy, Self-employment, State bank, WP

Publication Details

  • Pages:

    32

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2000/092

  • Stock No:

    WPIEA0922000

  • ISBN:

    9781451851588

  • ISSN:

    1018-5941

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