Credit Market Competition and Liquidity Crises
Abstract
We develop a model where banks invest in reserves and loans, and face aggregate liquidity shocks. Banks with liquidity shortage sell loans on the interbank market. Two equilibria emerge. In the no default equilibrium, all banks hold enough reserves and remain solvent. In the mixed equilibrium, some banks default with positive probability. The former exists when credit market competition is intense. The latter emerges when banks exercise market...
Paper Details
Title
Credit Market Competition and Liquidity Crises
Published Date
Jan 1, 2014
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