NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Bank Panics and the Endogeneity of Central Banking

Gary Gorton, Lixin Huang

NBER Working Paper No. 9102
Issued in August 2002
NBER Program(s):   CF   ME

Central banking is intimately related to liquidity provision to banks during times of crisis, the lender-of-last-resort function. This activity arose endogenously in certain banking systems. Depositors lack full information about the value of bank assets so that during macroeconomic downturns they monitor their banks by withdrawing in a banking panic. The likelihood of panics depends on the industrial organization of the banking system. Banking systems with many small, undiversified banks, are prone to panics and failures, unlike systems with a few big banks that are heavily branched and well diversified. Systems of many small banks are more efficient if the banks form coalitions during times of crisis. We provide conditions under which the industrial organization of banking leads to incentive compatible state contingent bank coalition formation. Such coalitions issue money that is a kind of deposit insurance and examine and supervise banks. Bank coalitions of small banks, however, cannot replicate the efficiency of a system of big banks.

download in pdf format
   (957 K)

email paper

This paper is available as PDF (957 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w9102

Published: Gorton, Gary & Huang, Lixin, 2006. "Bank panics and the endogeneity of central banking," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1613-1629, October. citation courtesy of

Users who downloaded this paper also downloaded these:
Gorton and Huang w9137 Banking Panics and the Origin of Central Banking
Calomiris and Gorton The Origins of Banking Panics: Models, Facts, and Bank Regulation
Gorton and Huang w9158 Liquidity, Efficiency and Bank Bailouts
Gorton w14358 The Panic of 2007
Gorton and Metrick w15273 Haircuts
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us