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Banks, relative performance, and sequential contagion

Tsomocos, Dimitrios P. and Bhattacharya, Sudipto and 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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Identification Number: 10.1007/s00199-006-0190-7

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
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HF Commerce
H Social Sciences > HG Finance
Sets: Departments > Finance
Research centres and groups > Financial Markets Group (FMG)
Date Deposited: 23 Nov 2011 10:12
Last Modified: 28 Mar 2017 14:32
URI: http://eprints.lse.ac.uk/id/eprint/39708

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