Wholesale Banking and Bank Runs in Macroeconomic Modelling of Financial Crises

92 Pages Posted: 20 Jan 2016 Last revised: 3 Feb 2016

See all articles by Mark Gertler

Mark Gertler

New York University - Leonard N. Stern School of Business - Department of Economics; National Bureau of Economic Research (NBER)

Nobuhiro Kiyotaki

Princeton University - Department of Economics

Andrea Prestipino

Board of Governors of the Federal Reserve System

Date Written: January 2016

Abstract

There has been considerable progress in developing macroeconomic models of banking crises. However, most of this literature focuses on the retail sector where banks obtain deposits from households. In fact, the recent financial crisis that triggered the Great Recession featured a disruption of wholesale funding markets, where banks lend to one another. Accordingly, to understand the financial crisis as well as to draw policy implications, it is essential to capture the role of wholesale banking. The objective of this paper is to characterize a model that can be seen as a natural extension of the existing literature that provides a step toward accomplishing this objective. The model accounts for both the buildup and collapse of wholesale banking, and also sketches out the transmission of the crises to the real sector. We also draw out the implications of possible instaibility in the wholesale banking sector for lender-of-last resort policy as well as for macroprudential policy.

Suggested Citation

Gertler, Mark and Kiyotaki, Nobuhiro and Prestipino, Andrea, Wholesale Banking and Bank Runs in Macroeconomic Modelling of Financial Crises (January 2016). NBER Working Paper No. w21892, Available at SSRN: https://ssrn.com/abstract=2717303

Mark Gertler (Contact Author)

New York University - Leonard N. Stern School of Business - Department of Economics ( email )

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Nobuhiro Kiyotaki

Princeton University - Department of Economics ( email )

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Andrea Prestipino

Board of Governors of the Federal Reserve System ( email )

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