Bank Heterogeneity and Financial Stability

57 Pages Posted: 15 Jun 2020 Last revised: 21 Apr 2023

See all articles by Itay Goldstein

Itay Goldstein

University of Pennsylvania - The Wharton School - Finance Department ; National Bureau of Economic Research (NBER)

Alexandr Kopytov

University of Rochester - Simon Business School

Lin Shen

INSEAD

Haotian Xiang

Guanghua School of Management, Peking University

Multiple version iconThere are 2 versions of this paper

Date Written: June 2020

Abstract

We study how heterogeneity in banks’ asset holdings affects fragility. In the model, banks face a risk of bank runs and have to liquidate long-term assets in a common market to repay runners. Liquidation prices are depressed when many banks sell their assets at the same time. When banks are homogeneous, their selling behaviors are synchronized, and bank runs are exacerbated. We show that differentiating banks to some extent enhances the stability of all banks, even those whose asset performance ends up being weaker. Our analyses provide new insights about the regulation of banking sector’s architecture and the design of government support during crises.

Suggested Citation

Goldstein, Itay and Kopytov, Alexandr and Shen, Lin and Xiang, Haotian, Bank Heterogeneity and Financial Stability (June 2020). NBER Working Paper No. w27376, Available at SSRN: https://ssrn.com/abstract=3626876

Itay Goldstein (Contact Author)

University of Pennsylvania - The Wharton School - Finance Department ( email )

The Wharton School
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National Bureau of Economic Research (NBER) ( email )

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Alexandr Kopytov

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
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Lin Shen

INSEAD ( email )

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77305 Fontainebleau Cedex
France

Haotian Xiang

Guanghua School of Management, Peking University ( email )

Beijing
China

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