Lessons for rescuing a SIFI: The Banque de France’s 1889 ‘lifeboat’

Pierre-Cyrille Hautcoeur, Angelo Riva, Eugene N. White 02 July 2014

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In the aftermath of the 2008 financial crisis, the Dodd-Frank Act of 2010 set out to limit the authority of the Federal Reserve to rescue insolvent financial institutions. Since 1932, Section 13(3) of the Federal Reserve Act had given the agency the power to lend to “any individual partnership, or corporation” in “unusual and exigent circumstances.” The 2010 Act now compels the Fed to consult with the Secretary of the Treasury before implementing a new lending program.

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Topics:  Economic history Financial markets

Tags:  Central Banks, financial crises, moral hazard, lender of last resort, bailout, bank runs, SIFIs, central banking, Banque de France

Exploring the transmission channels of contagious bank runs

Martin Brown, Stefan Trautmann, Razvan Vlahu 10 April 2014

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Financial contagion – the situation in which liquidity or insolvency risk is transmitted from one financial institution to another – is viewed by policymakers and academics as a key source of systemic risk in the banking sector. In particular, the events in the 2007–2009 Global Crisis have turned the attention of policymakers towards the potential contagion of liquidity withdrawals across banks and the resulting implications for financial stability.

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Topics:  Financial markets

Tags:  experimental economics, financial stability, financial crisis, global crisis, banking, contagion, banks, systemic risk, bank runs

Theories of financial crises

Itay Goldstein, Assaf Razin 11 March 2013

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Financial and monetary systems are designed to improve the efficiency of real activity and resource allocation. A large empirical literature in financial economics provides evidence connecting financial development to economic growth and efficiency (Levine 1997, Rajan and Zingales 1998). Unfortunately, financial crises, generating extreme disruption of the normal functions of financial and monetary systems, have happened frequently throughout history.

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Topics:  Global crisis Global economy International finance

Tags:  Banking crisis, Currency crises, bank runs, credit frictions, market freezes

Borrower runs: Behavioural motives and their policy implications

Stefan Trautmann, Razvan Vlahu 28 August 2011

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The typical bank run is a “lender run”; lenders and/or depositors take back their money in fear of the bank going bankrupt – and in doing so, make their fears come true. But there is another type of bank run – a “borrower run”.

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Topics:  Global crisis International finance

Tags:  Behavioural economics, bank runs, borrower runs, strategic default

Deposit insurance without commitment: Wall Street vs. Main Street

Russell Cooper, Hubert Kempf 18 February 2011

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The events which followed the subprime crisis, which started in August 2007, were shocking news to many economists. Bank runs were back!

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Topics:  Financial markets Global crisis International finance

Tags:  moral hazard, financial regulation, bank runs

Contagion through interbank markets

José-Luis Peydró, Rajkamal Iyer 25 April 2010

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How important are financial linkages in transmitting shocks across the financial system? How vulnerable is the financial system to contagion due to its high-degree of financial connections? What are the factors that mitigate the extent of contagion?

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Topics:  Global crisis International finance

Tags:  India, financial regulation, global crisis, bank runs