Financial Institutions, Contagious Risks, and Financial Crises

In this paper contagious risks and financial crises are endogenized through the interactions among corporations, banks, and the interbank market. We show that the lack of financial discipline in a single-bank-financing economy generates informational problems and thus the malfunction of the interbank market, which constitutes a mechanism of financial contagion and may lead to a financial crisis. In contrast, financial discipline in an economy with diversified financial institutions leads to timely information disclosure from firms to banks and improves the informational environment of the interbank market. With symmetric information in the interbank market, bank runs are contained to insolvent banks and financial crises are prevented. Our theory sheds light on the causes and timing of the East Asian crisis; it also has important policy implications for the lender of last resort and banking reform.http://deepblue.lib.umich.edu/bitstream/2027.42/39828/3/wp444.pd

Financial Institutions, Contagious Risks, and Financial Crises

In this paper contagious risks and financial crises are endogenized through the interactions among corporations, banks, and the interbank market. We show that the lack of financial discipline in a single-bank-financing economy generates informational problems and thus the malfunction of the interbank market, which constitutes a mechanism of financial contagion and may lead to a financial crisis. In contrast, financial discipline in an economy with diversified financial institutions leads to timely information disclosure from firms to banks and improves the informational environment of the interbank market. With symmetric information in the interbank market, bank runs are contained to insolvent banks and financial crises are prevented. Our theory sheds light on the causes and timing of the East Asian crisis; it also has important policy implications for the lender of last resort and banking reform.Banking and Finance, International Trade and Finance, financial institutions, contagious risks, financial crises

Financial Institutions, Financial Contagion, and Financial Crises

This paper endogenizes financial contagion and financial crises from financial institutions. We show that financial crises can emanate from financial institutions which generate soft-budget constraints (SBC). The prevailing SBC in an economy distort in-formation such that the interbank lending market faces a "lemon" problem. The lemon problem in the lending market may contribute to bank-run contagions and can lead to the collapse of the lending market while inducing a run on the economy. Moreover, due to the lemon problem in the financial system, a rational government policy in this economy will lead to a SBC trap that all the illiquid banks are to be bailed out. In comparison, we show that an economy with a predominance of diversified financial institutions will be featured by hard-budget constraints. From this point, we show mechanisms that in this economy firms disclose timely information to the banks and to the financial market as a whole. Thus bank runs can be stopped, contagious risks contained and financial crisis prevented.Financial Institutions, Corporate Finance, Bank Run, Financial Contaigion, Financial Crisis

Financial Institutions, Financial Contagion, and Financial Crises

Financial crises are endogenized through corporate and interbank market institutions. Financial crises can emanate from financial institutions which determine the nature of equilibrium in the interbank market. Single-bank financing leads to a pooling equilibrium whereby all illiquid banks are treated in the same manner in the interbank market. With private information about one's own solvency, the best illiquid banks will not borrow but rather will liquidate some premature assets. The withdrawals of the best banks from the interbank market will generate negative externalities in the market. Consequently, the quality of the interbank market will decline - which will make the more solvent but illiquid banks withdraw from the market - and thus the quality of the market will be further deteriorated and more banks will withdraw from the market, until interbank market collapses. However, multi-bank financing leads to a separating equilibrium whereby solvent and insolvent banks are distinguishable in the interbank market. As a result, bank runs are limited to illiquid and insolvent banks, and idiosyncratic shocks never trigger a bank run contagion.

Financial Crisis, Economic Recovery, and Banking Development in Russia, and other FSU Countries

This paper provides a unified analysis for the onset of the 1998 financial crisis and the strong economic recovery afterward in Russia and other former Soviet Union countries. Before the crisis a banking failure arose owing to the coexistence of a lemons credit market and high government borrowing. In a lemons credit market low credit risk firms switched from bank to nonbank finance, including trade credits and barter trade, generating an externality on banks’ interest rates. The collapse of the treasury bills market in the financial crisis triggered a change in banks’ lending behavior, providing initial conditions for banking development

Financial Crisis, Economic Recovery and Banking Development in Former Soviet Union Economies

This paper provides a unified theory to explain the onset of the financial crisis in 1998 and the striking economic recovery in Russia and the former Soviet Union afterwards. Before the crisis, the banking sector in these economies was stuck in a development trap in which the banking sector is separated from the real sector of the economy. The separation between the two sectors arises due to a lemons lending market and due to a large government budget. In a lemons credit market firms may find it cheaper to raise liquidity through non-bank finance (trade credits from other firms) rather than through bank finance. As a result non-bank finance may generate an externality on the lending rates of banks. In equilibrium most firms in the economy rely on non-bank finance and the financial sector focuses on trading government securities. The collapse of the treasury bills market in Russia in the financial crisis of 1998 reversed this process and thus acted as a trigger to pull the economy out of the trap. This has led to the strong economic recovery and provided initial conditions for banking development. Empirical evidence with firm level data from Ukraine in 1997 and with country level data for transition economies support the model’s predictions.banking development ; institutional trap ; trade credit ; nonbank finance ; finance in emerging market economies

Financial Crisis, Economic Recovery, and Banking Development in Russia, and other FSU Countries

This paper provides a unified analysis for the onset of the 1998 financial crisis and the strong economic recovery afterward in Russia and other former Soviet Union countries. Before the crisis a banking failure arose owing to the coexistence of a lemons credit market and high government borrowing. In a lemons credit market low credit risk firms switched from bank to nonbank finance, including trade credits and barter trade, generating an externality on banks’ interest rates. The collapse of the treasury bills market in the financial crisis triggered a change in banks’ lending behavior, providing initial conditions for banking development.banking development; institutional trap; financial crisis

Dynamical System of Scalar Field from 2-Dimension to 3-D and its Cosmological Implication

We give the three-dimensional dynamical autonomous systems for most of the popular scalar field dark energy models including (phantom) quintessence, (phantom) tachyon, k-essence and general non-canonical scalar field models, change the dynamical variables from variables $(x, y, \lambda)$ to observable related variables $(w_{\phi}, \Omega_{\phi}, \lambda)$, and show the intimate relationships between those scalar fields that the three-dimensional system of k-essence can reduce to (phantom) tachyon, general non-canonical scalar field can reduce to (phantom) quintessence and k-essence can also reduce to (phantom) quintessence for some special cases. For the applications of the three-dimensional dynamical systems, we investigate several special cases and give the exactly dynamical solutions in detail. In the end of this paper, we argue that, it is more convenient and also has more physical meaning to express the differential equations of dynamical systems in $(w_{\phi}, \Omega_{\phi}, \lambda)$ instead of variables $(x, y, \lambda)$ and to investigate the dynamical system in 3-Dimension instead of 2-Dimension. We also raise a question about the possibility of the chaotic behavior in the spatially flat single scalar field FRW cosmological models in the presence of ordinary matter.Comment: 20 pages, 8 figures,some references added. Minor changes according to the suggestions from referee

Financing Mechanisms and R&D Investment

This paper analyzes how financial institutions affect efficiency in R&D investments by providing a new contractual foundation for soft budget constraints. We show those inefficient elements (informational asymmetries and conflicts of interest among co-investors) in multi-investor financing can be used as, a commitment device to stop bad projects which are discovered ex post. In the case of single investors financing (such as internal financing). However, the commitment device does not exist. Our theory predicts that optimally many investors should finance an R&D project if there are high uncertainties. Otherwise, internal financial preferable. In addition, an institutional cost affects firm decisions and efficiency in R&D investments.http://deepblue.lib.umich.edu/bitstream/2027.42/39567/3/wp180.pd