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On the instability of banking and other financial intermediation

Author

Listed:
  • Chao Gu
  • Cyril Monnet
  • Ed Nosal
  • Randall Wright

Abstract

Are financial intermediaries inherently unstable and, if so, why? To address this, we analyse whether model economies with financial intermediation are particularly prone to multiple, cyclic or stochastic equilibria. Several formalisations are considered: a dynamic version of Diamond-Dybvig banking incorporating reputational considerations; a model with fixed costs and delegated investment as in Diamond; one with bank liabilities serving as payment instruments similar to currency in Lagos-Wright; and one with intermediaries as dealers in decentralised asset markets, similar to Duffie et al. Although the economics and mathematics differ across specifications, in each case financial intermediation engenders instability in a precise sense.

Suggested Citation

  • Chao Gu & Cyril Monnet & Ed Nosal & Randall Wright, 2020. "On the instability of banking and other financial intermediation," BIS Working Papers 862, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:862
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    References listed on IDEAS

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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. On the Instability of Banking and Other Financial Intermediation
      by Christian Zimmermann in NEP-DGE blog on 2019-07-08 18:29:12

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    More about this item

    Keywords

    banking; financial intermediation; instability; volatility;
    All these keywords.

    JEL classification:

    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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