Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/79712
Authors: 
Fecht, Falko
Eder, Armin
Pausch, Thilo
Year of Publication: 
2013
Series/Report no.: 
Beiträge zur Jahrestagung des Vereins für Socialpolitik 2013: Wettbewerbspolitik und Regulierung in einer globalen Wirtschaftsordnung - Session: Theory of Banking Regulation G19-V2
Abstract: 
In a theoretical model of the Diamond-Dybvig style, in which deposit-taking banks and financial markets coexist, bank behavior is analyzed taking into account a positive ex-ante probability of a future financial crisis. We focus on the role of the interaction of market liquidity and banks' funding liquidity in the propagation of shocks in the financial system. Our findings suggest that in particular bank-dominated financial systems are prone to contagious bank runs due to asset price deteriorations as a consequence of fire sales of assets in financial markets. Nevertheless, banks only prefer holding liquidity buffers to weather future crises if the ex-ante crisis probability exceeds a certain threshold. Moreover, central bank interventions are shown to have destabilizing effects because they reduce banks' incentives to hold liquidity buffers. This can be interpreted as a justification for prudential regulation in terms of minimum liquidity buffer requirements.
JEL: 
E58
G21
G28
Document Type: 
Conference Paper

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