Booms and Systemic Banking Crises

55 Pages Posted: 5 Mar 2013

See all articles by Frédéric Boissay

Frédéric Boissay

Bank for International Settlements (BIS)

Fabrice Collard

University of Berne - Department of Economics

Frank Smets

European Central Bank (ECB); KU Leuven - Center for Economic Studies

Multiple version iconThere are 3 versions of this paper

Date Written: February 11, 2013

Abstract

The empirical literature on systemic banking crises (SBCs) has shown that SBCs are rare events that break out in the midst of credit intensive booms and bring about particularly deep and long-lasting recessions. We attempt to explain these phenomena within a dynamic general equilibrium model featuring a non-trivial banking sector. In the model, banks are heterogeneous with respect to their intermediation skills, which gives rise to an interbank market. Moral hazard and asymmetric information on this market may generate sudden interbank market freezes, SBCs, credit crunches and, ultimately, severe recessions. Simulations of a calibrated version of the model indicate that typical SBCs break out in the midst of a credit boom generated by a sequence of positive supply shocks rather than being the outcome of a big negative wealth shock. We also show that the model can account for the relative severity of recessions with SBCs and their longer duration.

Keywords: Moral Hazard, Asymmetric Information, Lending Boom, Credit Crunch, Systemic Banking Crisis

JEL Classification: E32, E44, G01, G21

Suggested Citation

Boissay, Frédéric and Collard, Fabrice and Smets, Frank, Booms and Systemic Banking Crises (February 11, 2013). ECB Working Paper No. 1514, Available at SSRN: https://ssrn.com/abstract=2214970

Frédéric Boissay (Contact Author)

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Fabrice Collard

University of Berne - Department of Economics ( email )

Schanzeneckstrasse 1
Bern, CH-3001
Switzerland

HOME PAGE: http://fabcol.free.fr

Frank Smets

European Central Bank (ECB) ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany
+49 69 1344 6550 (Phone)
+49 69 1344 6575 (Fax)

KU Leuven - Center for Economic Studies ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

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