Liquidity Shortages and Banking Crises
We show in this article that bank failures can be contagious. Unlike earlier work where contagion stems from depositor panics or contractual links between banks, we argue that bank failures can shrink the common pool of liquidity, creating, or exacerbating aggregate liquidity shortages. This could lead to a contagion of failures and a total meltdown of the system. Given the costs of a meltdown, there is a possible role for government intervention. Unfortunately, liquidity and solvency problems interact and can cause each other, making it hard to determine the cause of a crisis. We propose a robust sequence of intervention. Copyright 2005 by The American Finance Association.
Year of publication: |
2005
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Authors: | DIAMOND, DOUGLAS W. ; RAJAN, RAGHURAM G. |
Published in: |
Journal of Finance. - American Finance Association - AFA, ISSN 1540-6261. - Vol. 60.2005, 2, p. 615-647
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Publisher: |
American Finance Association - AFA |
Saved in:
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