Working Paper: NBER ID: w27376
Authors: Itay Goldstein; Alexandr Kopytov; Lin Shen; Haotian Xiang
Abstract: We study how heterogeneity in banks’ asset holdings affects fragility. In the model, banks face a risk of bank runs and have to liquidate long-term assets in a common market to repay runners. Liquidation prices are depressed when many banks sell their assets at the same time. When banks are homogeneous, their selling behaviors are synchronized, and bank runs are exacerbated. We show that differentiating banks to some extent enhances the stability of all banks, even those whose asset performance ends up being weaker. Our analyses provide new insights about the regulation of banking sector’s architecture and the design of government support during crises.
Keywords: Banking; Financial Stability; Heterogeneity; Regulation
JEL Codes: G01; G21; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increase in bank asset heterogeneity (F65) | stability of all banks (G21) |
| increase in bank asset heterogeneity (F65) | overall stability of the banking system (G21) |
| increase in bank asset heterogeneity (F65) | Pareto improvement in stability (C62) |
| excessively large heterogeneity (C55) | increased fragility in weaker banks (F65) |
| increase in bank asset heterogeneity (F65) | reduces synchronization of bank runs (E44) |
| reduces synchronization of bank runs (E44) | stabilizes financial system (G28) |