Open Access
Credit Market Competition and Liquidity Crises
Loading...
Files
ECO_2012_14.pdf (505.1 KB)
ECO 2012/14
License
Access Rights
Cadmus Permanent Link
Full-text via DOI
ISBN
ISSN
1725-6704
Issue Date
Type of Publication
Keyword(s)
LC Subject Heading
Other Topic(s)
EUI Research Cluster(s)
Initial version
Published version
Succeeding version
Preceding version
Published version part
Earlier different version
Initial format
Author(s)
Citation
EUI ECO; 2012/14
Cite
CARLETTI, Elena, LEONELLO, Agnese, Credit Market Competition and Liquidity Crises, EUI ECO, 2012/14 - https://hdl.handle.net/1814/21675
Abstract
We develop a two-period model where banks invest in reserves and loans, and are subject to aggregate liquidity shocks. When banks face a a shortage of liquidity, they can sell loans on the interbank market. Two types of equilibria emerge. In the no default equilibrium, banks keep enough reserves and remain solvent. In the mixed equilibrium, some banks default with positive probability. The former equilibrium exists when credit market competition is intense, while the latter emerges when banks exercise market power. Thus, competition is beneficial to financial stability. The effect of default on welfare depends on the exogenous risk of the economy as represented by the probability of the good state of nature.