Banks, Relative Performance, and Sequential Contagion

Tsomocos, Dimitrios, Bhattacharya, Sudipto, Goodhart, Charles and Sunirand, Pojanart (2007) Banks, Relative Performance, and Sequential Contagion. Economic Theory, 32 (2). pp. 381-398.


We develop a multi-period general equilibrium model of bank deposit, credit, and interim inter-bank loan markets in which banks initially specialize in their choices of debtors, leading to under-diversification, but nevertheless become entwined via inter-bank markets, leading to the fortunes of one bank affecting the profits and default rates of the other in a sequential manner. Lack of (full) diversification among credit risks arises in our model owing to a relative profit argument in each banker’s utility function, which is otherwise risk- and default-averse. We examine its implications for the welfare of depositors and debtors.

Item Type: Article
Keywords: Relative performance; Sequential contagion; Banks; finance
Subject(s): Finance
Date Deposited: 25 Jan 2012 19:10
Last Modified: 09 Mar 2017 14:04
Funders: N/A

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