DP13834 Externalities and financial crisis - enough to cause collapse?
|Author(s):||Marcus Miller, Lei Zhang|
|Publication Date:||July 2019|
|Date Revised:||July 2019|
|Keyword(s):||bank runs, cross-border banking, Illiquidity, lender of last resort, Pecuniary externalities|
|JEL(s):||G01, G11, G24|
|Programme Areas:||Financial Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=13834|
After the boom in US subprime lending came the bust - with a run on US shadow banks. The magnitude of boom and bust were, it seems, amplified by two significant externalities triggered by aggregate shocks: the endogeneity of bank equity due to mark-to-market accounting and of bank liquidity due to 'fire-sales' of securitised assets. We show how adding a systemic 'bank run' to the canonical model of Adrian and Shin allows for a tractable analytical treatment - including the counterfactual of complete collapse that forces the Treasury and the Fed to intervene.