Financial Institutions, Financial Contagion, and Financial Crises

33 Pages Posted: 1 Feb 2006

See all articles by Haizhou Huang

Haizhou Huang

International Monetary Fund (IMF)

Chenggang Xu

University of Hong Kong

Multiple version iconThere are 2 versions of this paper

Date Written: May 2000

Abstract

Financial crises are endogenized through corporate and interbank market institutions. Single-bank financing leads to a pooling equilibrium in the interbank market. With private information about one`s own solvency, the best illiquid banks will not borrow but rather will liquidate some premature assets. The withdrawals of the best banks from the interbank market may lead more solvent but illiquid banks to withdraw from the market, until the interbank market collapses. However, multi-bank financing leads to a separating equilibrium in the interbank market. Thus, bank runs are limited to illiquid and insolvent banks, and idiosyncratic shocks never trigger a contagious bank run.

Keywords: Financial institutions, financial contagion, financial crises, interbank market

JEL Classification: E44, E58, F32, G21, G33

Suggested Citation

Huang, Haizhou and Xu, Chenggang, Financial Institutions, Financial Contagion, and Financial Crises (May 2000). IMF Working Paper No. 00/92, Available at SSRN: https://ssrn.com/abstract=879637

Haizhou Huang (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Chenggang Xu

University of Hong Kong ( email )

Pokfulam Road
Hong Kong, Pokfulam HK
China

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