Wholesale Banking and Bank Runs in Macroeconomic Modeling of Financial Crises

93 Pages Posted: 1 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: 2016-01-29

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, but in which the analysis is focused on wholesale funding markets. 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 instability in the wholesale banking sector for lender-of-last resort policy as well as for macroprudential policy.

Keywords: financial crises, wholesale banking, interbank markets, rollover risk

JEL Classification: E44

Suggested Citation

Gertler, Mark and Kiyotaki, Nobuhiro and Prestipino, Andrea, Wholesale Banking and Bank Runs in Macroeconomic Modeling of Financial Crises (2016-01-29). FRB International Finance Discussion Paper No. 1156, Available at SSRN: https://ssrn.com/abstract=2725020 or http://dx.doi.org/10.17016/IFDP.2016.1156

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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