Work

Government intervention, linkages and financial fragility

Year: 2023

Type: article

Abstract: We examine how financial integration affects financial stability and what government intervention maximizes stability and well-being, in a setup where depositors can obtain information on the quality of investments in their bank but there is a friction that prevents them from determining the quality of the investments of the other banks in the system. In this way, depositors will try to withdraw their deposits when they observe that the expected profitability in their bank is low. This situation will lead to a contagion problem as troubled banks may be forced to liquidate their investments in other banks. To prevent this contagion risk and reduce the costs of crises, we look at various policies governments can use, such as recapitalizing troubled banks, increasing capital requirements, or a lender-of-last-resort policy.

Source: Economic Modelling

DOI: 10.1016/j.econmod.2023.106429

Authors: Augusto Hasman, Margarita Samartín

Institutions: HES-SO University of Applied Sciences and Arts Western Switzerland, EHL Hospitality Business School, Universidad Carlos III de Madrid

Language: English

Topic: Banking stability, regulation, efficiency

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: hybrid

Estimated APC paid: $2,630

OpenAlex ID: W4383070451

FWCI: 3.75

Cites: 40

Cited by: 21

Related to: 10