Bank Runs, Liquidity and Credit Risk
34 Pages Posted: 20 May 2008
Abstract
In this paper, I develop a model that addresses the links between banks' liquidity outlook and their incentives to take credit risk. Assuming that both bank-specific liquidity shocks and credit losses are necessary to provoke bank runs, the model predicts that a bank's incentives to mitigate its credit risk by screening decrease if the probability of a bank-specific liquidity shock declines. This suggests that the benign liquidity outlook prevailing prior to the subprime crisis may have contributed to the lack of screening by banks that has been an important causal factor in the crisis.
Keywords: liquidity, credit risk screening, bank runs
JEL Classification: G12, G21, G28
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Innovations in Credit Risk Transfer: Implications for Financial Stability
-
Credit Derivatives, Disintermediation and Investment Decisions
-
Credit Risk Transfer and Contagion
By Franklin Allen and Elena Carletti
-
By Franklin Allen and Douglas M. Gale
-
Systemic Risk in the Financial Sector: An Analysis of the Subprime-Mortgage Financial Crisis
-
Credit Risk Transfer and Financial Sector Performance
By Wolf Wagner and Ian W. Marsh
-
Credit Risk Transfer and Financial Sector Performance
By Wolf Wagner and Ian W. Marsh
-
Default Risk Sharing between Banks and Markets: The Contribution of Collateralized Debt Obligations
By Guenter Franke and Jan Pieter Krahnen