Bank Heterogeneity and Financial Stability

60 Pages Posted: 24 Sep 2020 Last revised: 10 Dec 2020

See all articles by Itay Goldstein

Itay Goldstein

University of Pennsylvania - The Wharton School - Finance Department

Alexandr Kopytov

The University of Hong Kong - Faculty of Business and Economics

Lin Shen

INSEAD

Haotian Xiang

Peking University - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: August 31, 2020

Abstract

We investigate stability of a financial system featuring interconnected fragile banks. In the model, banks face run risks and have to liquidate long-term assets in a common market to repay runners. Liquidation prices are depressed when many banks sell their assets simultaneously. When bank assets are homogeneous, their selling behaviors are synchronized, and the feedback loop between runs and fire sales is exacerbated. We show that differentiating banks to some extent enhances stability of all banks, even those whose asset performance ends up being weaker. We discuss implications for the design of financial architecture and government support during crises.

JEL Classification: G01, G21, G28

Suggested Citation

Goldstein, Itay and Kopytov, Alexandr and Shen, Lin and Xiang, Haotian, Bank Heterogeneity and Financial Stability (August 31, 2020). Available at SSRN: https://ssrn.com/abstract=3683725 or http://dx.doi.org/10.2139/ssrn.3683725

Itay Goldstein

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

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-746-0499 (Phone)

Alexandr Kopytov (Contact Author)

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Lin Shen

INSEAD ( email )

Boulevard de Constance
77305 Fontainebleau Cedex
France

Haotian Xiang

Peking University - Department of Finance ( email )

Beijing
China

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