TY  - JOUR
AU  - Greenwood,Robin
AU  - Landier,Augustin
AU  - Thesmar,David
TI  - Vulnerable Banks
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 18537
PY  - 2012
Y2  - November 2012
UR  - http://www.nber.org/papers/w18537
L1  - http://www.nber.org/papers/w18537.pdf
N1  - Author contact info:
Robin Greenwood
Harvard Business School
Baker Library 267
Soldiers Field
Boston, MA 02163
Tel: 617/495-6979
Fax: 617/496-8443
E-Mail: rgreenwood@hbs.edu

Augustin Landier
the Toulouse School of Economics
21 Allée de Brienne
31000 Toulouse, FRANCE
E-Mail: augustin.landier@tse-fr.eu

David Thesmar
HEC Paris
1 rue de la libération
78351 Jouy-en-Josas cedex
France
Tel: 33139679412
E-Mail: thesmar@hec.fr
AB  - When a bank experiences a negative shock to its equity, one way to return to target leverage is to sell assets. If asset sales occur at depressed prices, then one bank’s sales may impact other banks with common exposures, resulting in contagion. We propose a simple framework that accounts for how this effect adds up across the banking sector. Our framework explains how the distribution of bank leverage and risk exposures contributes to a form of systemic risk. We compute bank exposures to system-wide deleveraging, as well as the spillover of a single bank’s deleveraging onto other banks. We show how our model can be used to evaluate a variety of crisis interventions, such as mergers of good and bad banks and equity injections. We apply the framework to European banks vulnerable to sovereign risk in 2010 and 2011.
ER  -