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Title: The inefficiency of bank modules as a containment response to financial contagion : a benchmark result derived using a partition approach
Author: Youdell, Paul
Awarding Body: University of Warwick
Current Institution: University of Warwick
Date of Award: 2013
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Following the recent international financial crisis, a number of policy proposals have been made: one of which is the partitioning of banks into modules (groups), to contain financial shocks. The firewalls, which surround modules, prevent financial contagion: when a shock hits a bank it spreads to other banks in the same module, but not to banks in other modules. Conditional on bank modules avoiding shocks, businesses can achieve their latent business opportunities. The optimal banking system has a cost-benefit trade off: increased module size allows for more lucrative business opportunities, but increases systemic banking risk. This thesis, using a theoretical approach, assesses the importance of the distribution of business opportunities when using modules. When the distribution is uniform, the optimal structure of the banking industry is fully characterised: it surprisingly takes only two forms, either one all-encompassing module (containing all the banks), or atomistic modules (each module contains only one bank). The intuition behind this sharp characterisation is the increasing marginal returns that modules have on social welfare. A counter-example is constructed where, with a non-uniform matching of business opportunities, conversely, the efficient solution does have multiple modules each containing multiple banks. The model’s policy recommendation is that the banking system needs to be designed in accordance with the financial requirements of businesses.
Supervisor: Not available Sponsor: Economic and Social Research Council (Great Britain) (ESRC) ; Department of Economics, University of Warwick
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID:  DOI: Not available
Keywords: HB Economic Theory ; HG Finance ; QA Mathematics