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System‐Wide Runs and Financial Collapse

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  • DONGIK KANG

Abstract

This paper presents a model in which small shocks to asset values can trigger system‐wide runs. When lenders cannot distinguish which financial institutions have suffered losses after an adverse shock to asset values, healthier institutions can differentiate themselves from weaker firms by offering to borrow less at more favorable prices. However, to successfully separate, the healthy institutions must liquidate a fraction of their portfolio causing asset fire sales. Fire sales worsen the balance sheet integrity of the firms and, if too severe, this leads to a complete collapse of the financial system: a system‐wide run.

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  • Dongik Kang, 2023. "System‐Wide Runs and Financial Collapse," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 55(2-3), pages 531-558, March.
    • Handle: RePEc:wly:jmoncb:v:55:y:2023:i:2-3:p:531-558
    DOI: 10.1111/jmcb.12947
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    References listed on IDEAS

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