Three Essays on Banking Crises
I am writing three papers that deal with banking crises. The first one is “Liquidity Holdings, Cheap Money and Moral Hazard by Banks” that analyzes the effect of government rescues on banks incentives. The second one is “Bank Mergers and Financial Instability”, where bank mergers allow the prosecution of big projects but sometimes increase financial vulnerability and finally, “Government, Taxes and Financial Crises” that is the first paper to consider theoretically the possibility of a government generating a banking crisis.
Information Acquisition and Financial Contagion
(with Margarita Samartín, published in the JOURNAL OF BANKING AND FINANCE)
The paper incorporates costly voluntary acquisition of information à la Nikitin and Smith (2007), in a framework similar to Allen and Gale (2000), without relying on any unexpected shock to model contagion. In this framework, contagion and financial crises are the result of information gathering by depositors, weak fundamentals and an incomplete market structure of banks. It also shows how financial systems entering a recession can affect others with apparently stronger economic conditions (contagion). Finally, this is the first paper to investigate the effectiveness of the Contingent Credit Line procedures, introduced by the IMF at the end of the nineties, as a mechanism to prevent the propagation of crises.
