Template-Type: ReDIF-Paper 1.0
Author-Name: Chao Gu
Author-X-Name-First: Chao
Author-X-Name-Last: Chao
Author-Name: Cyril Monnet
Author-X-Name-First: Cyril
Author-X-Name-Last: Monnet
Author-Name: Ed Nosal
Author-X-Name-First: Ed
Author-X-Name-Last: Nosal
Author-Name: Randall Wright
Author-X-Name-First: Randall
Author-X-Name-Last: Wright
Title: On the instability of banking and other financial intermediation
Abstract: Are financial intermediaries inherently unstable and, if so, why? To address this, we analyse whether model economies with financial intermediation are particularly prone to multiple, cyclic or stochastic equilibria. Several formalisations are considered: a dynamic version of Diamond-Dybvig banking incorporating reputational considerations; a model with fixed costs and delegated investment as in Diamond; one with bank liabilities serving as payment instruments similar to currency in Lagos-Wright; and one with intermediaries as dealers in decentralised asset markets, similar to Duffie et al. Although the economics and mathematics differ across specifications, in each case financial intermediation engenders instability in a precise sense.
Length: 51 pages
Creation-Date: 2020-05
File-URL: https://www.bis.org/publ/work862.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work862.htm
File-Format: text/html
Number: 862
Classification-JEL: D02, E02, E44, G21
Keywords: banking, financial intermediation, instability, volatility
Handle: RePEc:bis:biswps:862