In the Quest of Systemic Externalities: A Review of the Literature
22 Pages Posted: 15 Jun 2009 Last revised: 30 Oct 2010
Date Written: June 13, 2009
We review the banking literature with the view of identifying systemic externalities arising from bank failures. We are particularly interested in how such externalities may depend on the characteristics of the financial system at the time of failure, and on the characteristics of the failing bank itself. We conclude that the majority of the mechanisms in the literature suggest that externalities are higher at times when other banks are failing as well or are close to failure. We discuss the implications for optimal capital requirements.
Keywords: banking crisis, systemic risk, welfare, regulation
JEL Classification: G01, G21, G28
Suggested Citation: Suggested Citation