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Banks, relative performance, and sequential contagion

Tsomocos, Dimitrios P., Bhattacharya, Sudipto, Goodhart, Charles A. E. and Sunirand, Pojanart (2007) Banks, relative performance, and sequential contagion. Economic Theory, 32 (2). pp. 381-398. ISSN 0938-2259

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Abstract

We develop a multi-period general equilibrium model of bank deposit, credit, and interim inter-bank loan markets in which banks initially specialize in their choices of debtors, leading to under-diversification, but nevertheless become entwined via inter-bank markets, leading to the fortunes of one bank affecting the profits and default rates of the other in a sequential manner. Lack of (full) diversification among credit risks arises in our model owing to a relative profit argument in each banker’s utility function, which is otherwise risk- and default-averse. We examine its implications for the welfare of depositors and debtors.

Item Type: Article
Official URL: http://dx.doi.org/10.1007/s00199-006-0190-7
Additional Information: © Springer-Verlag 2007
Library of Congress subject classification: H Social Sciences > HB Economic Theory
H Social Sciences > HF Commerce
H Social Sciences > HG Finance
Journal of Economic Literature Classification System: C - Mathematical and Quantitative Methods > C3 - Econometric Methods: Multiple; Simultaneous Equation Models; Multiple Variables; Endogenous Regressors > C33 - Models with Panel Data
C - Mathematical and Quantitative Methods > C6 - Mathematical Methods and Programming > C68 - Computable General Equilibrium Models
E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates
G - Financial Economics > G0 - General
Sets: Departments > Finance
Research centres and groups > Financial Markets Group (FMG)
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Date Deposited: 23 Nov 2011 10:12
URL: http://eprints.lse.ac.uk/39708/

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