Liquidity Pools, Risk Sharing, and Financial Contagion

Liquidity Pools, Risk Sharing, and Financial Contagion

This paper reevaluates the Allen-Gale (2000) analysis of interbank deposits to explain financial contagion. This paper modifies the pecking order of asset liquidation developed in Allen-Gale, which is essential in fragility analysis. Furthermore, we also provide a claim structure called "liquid...

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Veröffentlicht in:Journal of financial services research 2004-02, Vol.25 (1), p.5-23
Hauptverfasser: Sáez, Lawrence, Shi, Xianwen
Format: Artikel
Sprache:eng
Schlagworte:
Banking
Banking industry
Central banks
Deposit insurance
Economic conditions
Economic models
Financial analysis
financial contagion.
Financial crisis
Financial intermediation
Financial models
Liquidation
Liquidity
Regional banks
Regions
Risk sharing
Studies
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Zusammenfassung:This paper reevaluates the Allen-Gale (2000) analysis of interbank deposits to explain financial contagion. This paper modifies the pecking order of asset liquidation developed in Allen-Gale, which is essential in fragility analysis. Furthermore, we also provide a claim structure called "liquidity pool" that can both achieve risk sharing and prevent financial contagion across regions when asymmetric information about bank assets is absent. This model can partly explain why bank panics reduced substantially after the founding of the Fed and the role of IMF in regional financial crises. [PUBLICATION ABSTRACT]
ISSN:0920-8550
1573-0735
DOI:10.1023/B:FINA.0000008662.59653.33