Bank-Firm Relationships and Contagious Banking Crises

EFA 2001 Barcelona Meetings

33 Pages Posted: 16 Aug 2001

See all articles by Mariassunta Giannetti

Mariassunta Giannetti

Stockholm School of Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Swedish House of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: July 2001

Abstract

This paper shows that in an open economy a banking system with close bank-firm relationships may be easily subject to contagious banking crises, because it is difficult to distinguish between "crony capitalism" and main bank relationships. There is cronyism if banks renew loans to insolvent projects and, as a consequence, accumulate losses. On the other hand, banks could be only temporarily illiquid because they lend to projects in temporary difficulties that would be solvent in the long run (main bank relationship). I show that, if international investors cannot distinguish the bank type, the distinction between crony capitalism and main bank relationships becomes very fuzzy. In fact, incomplete information provokes a uniformly low equilibrium interest rate in the aftermath of the liberalization of capital flows, when the lending boom starts, and an apparently sudden increase in the cost of funds, which causes the defaults of insolvent banks. Even if illiquid banks do not default immediately, so revealing that they are not insolvent, the temporary increase in the interest rate burden may drive them to insolvency and make them default after a few periods. This model can explain sequences of bank defaults within a country, even if the insolvent banks were very few ex ante, as well as sequences of banking crises among countries that are equally rated by international investors, but indeed differ in the ex ante solvency of their banking system.

Keywords: Banking crises, contagion, main bank, crony capitalism

JEL Classification: F34, F42, G21, E44

Suggested Citation

Giannetti, Mariassunta, Bank-Firm Relationships and Contagious Banking Crises (July 2001). EFA 2001 Barcelona Meetings. Available at SSRN: https://ssrn.com/abstract=275916 or http://dx.doi.org/10.2139/ssrn.275916

Mariassunta Giannetti (Contact Author)

Stockholm School of Economics ( email )

P.O. Box 6501
Sveavagen 65
SE-113 83 Stockholm
Sweden
+46 8 736 9607 (Phone)
+46 8 312 327 (Fax)

HOME PAGE: http://sites.google.com/site/mariassuntagiannetti/Home

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

Register to save articles to
your library

Register

Paper statistics

Downloads
402
rank
70,645
Abstract Views
2,471
PlumX Metrics