TY  - JOUR
AU  - Diamond,Douglas W.
AU  - Rajan,Raghuram G.
TI  - Liquidity Shortages and Banking Crises
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 10071
PY  - 2003
Y2  - November 2003
UR  - http://www.nber.org/papers/w10071
L1  - http://www.nber.org/papers/w10071.pdf
N1  - Author contact info:
Douglas W. Diamond
Booth School of Business
University of Chicago
5807 S Woodlawn Avenue
Chicago, IL 60637
Tel: 773/702-7283
Fax: 773/834-9134
E-Mail: douglas.diamond@chicagobooth.edu

Raghuram Rajan
Booth School of Business
University of Chicago
5807 South Woodlawn Avenue
Chicago, IL 60637
Tel: 773/702-4437
Fax: 773/702-0458
E-Mail: raghuram.rajan@ChicagoBooth.edu
AB  - We show in this paper that bank failures can be contagious. Unlike earlier work where contagion stems from depositor panics or ex ante contractual links between banks, we argue bank failures can shrink the common pool of liquidity, creating or exacerbating aggregate liquidity shortages. This could lead to a contagion of failures and a possible total meltdown of the system. Given the costs of a meltdown, there is a possible role for government intervention. Unfortunately, liquidity problems and solvency problems interact and can cause each other, making it hard to determine the root cause of a crisis from observable factors. We propose a robust sequence of intervention.
ER  -