Heterogeneity and Stability: Bolster the Strong, Not the Weak

53 Pages Posted: 3 Oct 2013

See all articles by Dong Beom Choi

Dong Beom Choi

Seoul National University - Business School

Date Written: September 1, 2013


This paper provides a model of systemic panic among financial institutions with heterogeneous fragilities. Concerns about potential spillovers from each other generate strategic interaction among institutions, triggering a preemption game in which one tries to exit the market before the others to avoid spillovers. Although financial contagion originates in weaker institutions, systemic risk depends critically on the financial health of stronger institutions in the contagion chain. This analysis suggests that when concerns about spillovers prevail, then 1) increasing heterogeneity of institutions promotes systemic stability and 2) bolstering the strong institutions in the contagion chain, rather than the weak, more effectively enhances systemic stability.

Keywords: financial spillovers, panic, financial crises

JEL Classification: G00, G01

Suggested Citation

Choi, Dong Beom, Heterogeneity and Stability: Bolster the Strong, Not the Weak (September 1, 2013). FRB of New York Staff Report No. 637, Available at SSRN: https://ssrn.com/abstract=2334917 or http://dx.doi.org/10.2139/ssrn.2334917

Dong Beom Choi (Contact Author)

Seoul National University - Business School ( email )

Korea, Republic of (South Korea)

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