Working Paper: CEPR ID: DP13834
Authors: Marcus Miller; Lei Zhang
Abstract: After the boom in US subprime lending came the bust - with a run on US shadow banks. The magnitude of boom and bust were, it seems, amplified by two significant externalities triggered by aggregate shocks: the endogeneity of bank equity due to mark-to-market accounting and of bank liquidity due to ‘fire-sales’ of securitised assets. We show how adding a systemic ‘bank run’ to the canonical model of Adrian and Shin allows for a tractable analytical treatment - including the counterfactual of complete collapse that forces the Treasury and the Fed to intervene.
Keywords: Cross-border banking; Pecuniary externalities; Bank runs; Illiquidity; Lender of last resort
JEL Codes: G01; G11; G24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| endogeneity of bank equity due to mark-to-market accounting (G21) | amplification of effects of aggregate shocks (E19) |
| liquidity of banks due to fire sales of securitized assets (E44) | amplification of effects of aggregate shocks (E19) |
| decline in asset prices (G19) | liquidity crisis in banks (F65) |
| liquidity crisis in banks (F65) | bank run (E44) |
| bank run (E44) | decline in asset prices (G19) |
| regulatory frameworks that ignore systemic risk (G18) | amplification of shocks (E32) |
| individual decisions to sell assets in response to bad news (D14) | market-wide fire sales (G10) |
| market-wide fire sales (G10) | decline in asset prices (G19) |
| misrepresentation of asset quality by banks (G21) | fragility of the financial system (F65) |