We examine to what extent banks’ stock market values during the 2007-2012 financial crisis were driven by increases in the default risk of banks designated as globally systemically important by the Financial Stability Board. We find that bank market values hardly respond to changes in the...

The current financial crisis has sparked intense debate about how weak banks should be resolved. Despite international efforts to coordinate and converge on such policies, national policy advice and resolution practices differ. The resolution methods adopted in the Nordic banking crises in the...

Interbank claims are a concern to regulators as they might facilitate the dissemination of defaults and generate spill-over effects. Building on a simple model, this paper introduces a measure of the spill-over effects that a bank generates when it defaults. The measure is based on an explicit...

This paper addresses the impact of developments in the credit risk transfer market on the viability of a group of systemically important financial institutions. We propose a bank default risk model, in the vein of the classic Merton-type, which utilizes a multi-equation framework to model...

The number of firm bankruptcies is surprisingly low in economies with poor institutions. We study a model of bank-firm relationship and show that the bank’s decision to liquidate bad firms has two opposing effects. First, the bank receives a payoff if a firm is liquidated. Second, it loses the...

We use the Kalman filter to estimate the structure of the secret currency basket of the renminbi based on daily data between 2005 and 2009. The currency weights of selected currencies are modeled as stochastic processes (random walks). The official announcement of the new exchange rate regime in...

Why do banks remain passive? In a model of bank-firm relationship we study the trade-off a bank faces when having defaulting firms declared bankrupt. First, the bank receives a payoff if a firm is liquidated. Second, it provides information about a firm’s type to its competitors. Thereby,...

Financial institutions are increasingly linked internationally. As a result, financial crisis and government intervention have stronger effects beyond borders. We provide a model of international contagion allowing for bank bailouts. While a social planner trades off tax distortions, liquidation...

This paper unveils a new resource for macroeconomic research: a long-run dataset covering disaggregated bank credit for 17 advanced economies since 1870. The new data show that the share of mortgages on banks’ balance sheets doubled in the course of the 20th century, driven by a sharp rise of...

We develop a model where banks invest in reserves and loans, and face aggregate liquidity shocks. Banks with liquidity shortage sell loans on the interbank market. Two equilibria emerge. In the no default equilibrium, all banks hold enough reserves and remain solvent. In the mixed equilibrium,...