Currently, private trust in commercial banks declines as a consequence of today´s financial crisis. As past crises, e.g. the Asian crisis, show, the loss of confidence in the financial sector typically causes private agents to withdraw their capital from financial institutions. Thus, the...

When the current financial crisis has widened to a global economic crisis an urgent call for implementing financial markets and financial institutions in business cycle models emerged. By modelling commercial banks as a third type of economic agent, we are able to implement the feature of early...

This paper examines common regulation as cause of interbank contagion. Studies based on the correlation of bank assets and the extent of interbank lending may underestimate the likelihood of contagion because they do not incorporate the fact that banks have a common regulator. In our model, the...

In the literature, bank runs take the form of withdrawals of real demand deposits that deplete a fixed reserve of goods in the banking system. This framework describes the type of bank run that has occurred historically in the United States and more recently in developing countries. However, in...

We study the role of commitment in a version of the Diamond and Dybvig (JPE, 1983) model with no aggregate uncertainty. As is well known, the banking authority can eliminate the possibility of a bank run by committing to suspend payments to depositors if a run were to start. We show, however,...

In this paper, we argue for a regulatory framework under which a bank’s required level of equity capital depends on the equity capital of its peers. Such bankingon- the-average rules are transparent and could also be combined with the current regulatory framework. In addition, we argue that...

Since August 1998, Russia has been suffering from a severe banking crisis. In finding a solution, two peculiarities of the Russian economy need to be taken into account: the substantial foreign liabilities of commercial banks and the failure of the government to service its liabilities. Apart...

I develop a model where governments might prefer to have an undercapitalized domestic financial sector during crises. Weak banks optimally tilt their sovereign bond portfolio towards domestic securities that are positively correlated with banks' other sources of revenues. Governments anticipate...