Skip to main content
Article thumbnail
Location of Repository

Financial systems, micro-systemic risks and Central Bank policy: an analytical taxonomy of the literature

By Ashwin Moheeput


This paper reviews and categorises the literature on micro-systemic risks and on optimal policies designed to mitigate these risks. Micro-systemic risks are risks to the financial system that occur when the interaction of a bank with other banks or with financial markets, can propagate an initially localised shock to the whole financial system and can prevent the latter from fulfilling its intermediation and distributional roles. The severe episodes of financial crises that have plagued economies - developed and emerging markets alike - have made more compelling, the need for policymakers such as central banks, to develop prudential tools as part of crisis prevention and crisis management policies. We review the success of these policies under different theoretical paradigms. The paper ends with a brief synopsis of financial accelerator models which stress on how imperfections in financial markets may magnify the swings and intensity of business cycles and have a more entrenched impact on the macroeconomy

Topics: HG, HB
Publisher: University of Warwick, Department of Economics
Year: 2008
OAI identifier:

Suggested articles


  1. (1998). A welfare Analysis of the Interbank market”, GREMAQ, Universite des Sciences Sociales.
  2. (1983). Agency costs, doi
  3. and A.Pauzner(2002): “ Demand Deposits and Probability of bank runs”, mimeo, doi
  4. (1998). and D.Gale doi
  5. and D.Gale (1987): “Preference shocks, Liquidity and Central Bank Policy” doi
  6. and D.Gale (1994): “Limited Market Participation and Volatility of Asset Price”,
  7. and D.Gale (2000): “Financial Contagion”, doi
  8. and D.Gale (2004): “Financial intermediaries and Financial Markets, doi
  9. and H.S.Shin (1998): “Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks”, doi
  10. and H.S.Shin (2003): “Foreshadowing LTCM: The crisis of 1763”, mimeo
  11. and J.C.Rochet: “Microeconomics of Banking”, doi
  12. and M.Dewatripont (2000): “Contagious bank failures in a free banking system”, doi
  13. and P.Dybvig (1983): “Bank Runs, Deposit Insurance and Liquidity”, doi
  14. and R.G.King (1998): “Financial Deregulation, Monetary Policy and Central Banking”, Federal Reserve Bank of Richmond Economic Review,
  15. and R.Rajan (2000): “A Theory of Bank Capital”, doi
  16. and R.Rajan (2001): “Banks and Liquidity”, doi
  17. and R.Rajan (2001): “Liquidity Risk, Liquidity Creation and Financial Fragility: a theory of Banking”, doi
  18. and X.Vives(1987): “Bank runs as an Equilibrium Phenomenon”, doi
  19. (1988). Another attempt to explain an illiquid banking system: the Diamond-Dybvig model with sequential service taken seriously”, Quarterly Review of the Ferderal Reserve Bnak of Minneapolis
  20. B.Parigi and J.C.Rochet(2000): “Systemic Risk, Interbank Relations and Liquidity Provision by the Central Bank”, doi
  21. (1988). Bank Panics and Business Cycles”, doi
  22. (1998). Bank runs : Deposit Insurance and Capital Requirements”, mimeo, doi
  23. (2001). Bank runs, welfare and policy implications”, BIS Working papers No. doi
  24. (2004). Banking crises and the lender of last resort: how crucial is the role of information?”, mimeo, doi
  25. (1988). Banking Panics, Information and Rational expectations”, doi
  26. (1999). Banking Panics: The role of First-Come, First-Serve Rule and Information Externalities”, doi
  27. Competition for deposits, fragility and insurance”, doi
  28. (2002). Coordination Failure and Lender of Last Resort: was Bagehot right after all?”, mimeo doi
  29. (1992). Costly Liquidation, Interbank Trade, Bank Runs and Panics”, doi
  30. (1993). Credit market equilibrium with bank monitoring and moral hazard”, doi
  31. (1987). Demand Deposits, Trading Restrictions and Risk Sharing”, in Contractual Arrangements for Intertemporal Trade,
  32. (1988). Distinguishing Panics and Information-based bank runs: Welfare and Policy implications”, doi
  33. (2003). Financial Contagion through Capital Connections: A model of the origin and spread of Bank Panics”, doi
  34. (1996). Financial Crises, Payments System Problems and Discount Window Lending”, doi
  35. (2004). Financial Stability Review, Bank of England series
  36. G.Ferrucci and H.S.Shin (2003): “Liquidity Risk and Contagion”, doi
  37. (2002). Information Contagion and Inter-Bank Correlation in a Theory of Systemic Risk”, doi
  38. (1995). Inside the Black Box: The Credit Channel and Monetary Policy Transmission”, doi
  39. (1996). Interbank Lending and Systemic Risk”, doi
  40. (1994). Lender-Of-Last-Resort: A Contemporary Perspective”, doi
  41. (2003). Liquidity, Risk Taking and Lender of Last Resort”, doi
  42. (1996). Narrow banking meets the Diamond-Dybvig model”, Quarterly Review of the Federal Reserve Bank of Minneapolis
  43. (2005). Optimal financial stability policy in a model with heterogenous financial intermediaries”, Bank of England
  44. (1998). Private and Public Supply of Liquidity”, doi
  45. (1992). The Federal Funds Rate and the Channels of Monetary Transmission”, doi
  46. (1994). The Impact of Monetary Policy on Bank Balance Sheets”, doi
  47. (1991). The origins of Banking Panics, Models, Facts and Banking Regulation”, doi
  48. (1991). The role of Demandable Debt in structuring optimal bank arrangements”,
  49. (1994). Uncertain Liquidity and interbank contracting”, doi

To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.