Financial Institutions, Contagious Risks, and Financial Crises

Haizhou Huang () and Chenggang Xu

No 444, William Davidson Institute Working Papers Series from William Davidson Institute at the University of Michigan

Abstract: In this paper contagious risks and financial crises are endogenized through the interactions among corporations, banks, and the interbank market. We show that the lack of financial discipline in a single-bank-financing economy generates informational problems and thus the malfunction of the interbank market, which constitutes a mechanism of financial contagion and may lead to a financial crisis. In contrast, financial discipline in an economy with diversified financial institutions leads to timely information disclosure from firms to banks and improves the informational environment of the interbank market. With symmetric information in the interbank market, bank runs are contained to insolvent banks and financial crises are prevented. Our theory sheds light on the causes and timing of the East Asian crisis; it also has important policy implications for the lender of last resort and banking reform.

Keywords: Banking and Finance; International Trade and Finance; financial institutions; contagious risks; financial crises (search for similar items in EconPapers)
Pages: pages
Date: 2001-01-01
New Economics Papers: this item is included in nep-ifn, nep-mac and nep-pke
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:wdi:papers:2001-444

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