Why Are There So Many Banking Crises? The Politics and Policy of Bank Regulation

By Jean-Charles Rochet | Go to book overview

Chapter Seven

Systemic Risk, Interbank Relations, and the
Central Bank

Xavier Freixas, Bruno M. Parigi, and Jean-Charles Rochet

The possibility of a systemic crisis affecting the major financial markets has raised regulatory concern all over the world. Whatever the origin of a financial crisis, it is the responsibility of the regulatory body to provide adequate fire walls for the crisis not to spill over to other institutions. In this paper we explore the possibilities of contagion from one institution to another that can stem from the existence of a network of financial contracts. These contracts are essentially generated from three types of operations: the payments system, the interbank market, and the market for derivatives.1 Since these contracts are essential to the financial intermediaries' function of providing liquidity and risk sharing to their clients, the regulating authorities have to set patterns for central bank intervention when confronted with a systemic shock. In recent years, the 1987 stock market crash, the Savings and Loan crisis, the Mexican, Asian, and Russian crises, and the crisis of the Long Term Capital Management hedge fund have all shown the importance of the intervention of the central banks and of the international financial institutions in affecting the extent, contagion, patterns, and consequences of the crises.2

1There is ample empirical evidence on financial contagion. For a survey see de Bandt
and Hartmann (2002). Kaufman (1994) reviews empirical studies that measure the
adverse effects on banks' equity returns of default of a major bank and of a sovereign
borrower or unexpected increases in loan-loss provisions announced by major banks.
Others have studied contagion through the flow of deposits (Saunders and Wilson 1996)
and using historical data (Gorton 1988; Schoenmaker 1996; Calomiris and Mason 1997).
Whatever the methodology, these studies support the view that pure panic contagion is
rare. Far more common is contagion through perceived correlations in bank asset returns
(particularly among banks of similar size and/or geographical location).

2A well-known episode of near financial gridlock where a coordinating role was played
by the central bank is represented by the series of events the day after the stock crash of
1987. Brimmer (1989, pp. 14–15) writes that “On the morning of October 20, 1987, when
stock and commodity markets opened, dozens of brokerage firms and their banks had
extended credit on behalf of customers to meet margin calls, and they had not received
balancing payments through the clearing and settlement systems…. As margin calls
mounted, money center banks (especially those in New York, Chicago, and San Francisco)

-195-

Notes for this page

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items
Notes
Cite this page

Cited page

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited page

Bookmark this page
Why Are There So Many Banking Crises? The Politics and Policy of Bank Regulation
Table of contents

Table of contents

Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this book

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen
Items saved from this book
  • Bookmarks
  • Highlights & Notes
  • Citations
/ 308

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Search by... Author
    Show... All Results Primary Sources Peer-reviewed

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.