Financial Imbalances and Financial Fragility

39 Pages Posted: 28 Dec 2010 Last revised: 6 May 2011

See all articles by Frédéric Boissay

Frédéric Boissay

Bank for International Settlements (BIS)

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Date Written: May 3, 2011

Abstract

Sudden reversals in banks' leverage cycle are modelled as the result of tensions between the abundance of liquidity and the limited capacity of the banking sector to process this liquidity and re-allocate it internally through the interbank market. I use the model to analyze the effects of financial integration of emerging market and developed economies. Financial integration permits a more efficient allocation of savings worldwide in normal times, but also entails capital flows toward developed economies. Financial crises occur when these capital inflows exceed the developed countries' absorptive capacity. Implications in terms of financial fragility, welfare, and policy interventions are discussed.

Keywords: Financial Integration, Global Imbalances, Asymmetric Information, Moral Hazard, Financial Crisis

JEL Classification: E21, F36, G01, G21

Suggested Citation

Boissay, Frédéric, Financial Imbalances and Financial Fragility (May 3, 2011). Available at SSRN: https://ssrn.com/abstract=1731570 or http://dx.doi.org/10.2139/ssrn.1731570

Frédéric Boissay (Contact Author)

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

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