Name: Zhen Zhou
Institution: Department of Economics, New York University
Time: 13:30-15:00, July 11th
Location: RM316, No.11 Building, Fudan University
Abstract: This paper incorporates the financial panic into the analysis of how financial stability depends on the financial interconnectedness. We find that financial connections do not only transmit fundamental shocks, but also intensify and propagate financial panics. This enables an endogenous amplification of financial fragility. A novel mechanism is found to show that a more diversified pattern of interbank linkages will trigger more panics and make the financial system more fragile. When one bank in the network receives a shock that is large enough to make it insolvent, creditors may be uncertain about the financial linkages between their bank and the distressed bank. When such a crisis is underway, we show that disclosing the information about financial linkages across banks makes a systemic crisis more likely to occur. We discuss the implications for regulations on banks' counterparty exposure limits and the policy of information disclosure.
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