Liquidity Creation, Relief And Banking Crisis

Since the bank was created at Italy, so many banking crises occurred and some more is coming. Most of them had attacked the real economy and shrunk the economy growth of relative country. Some can affect the global economy's perspective, like the Asian financial crises which happened at 1997, and the subprime mortgage credit crisis which we are suffering now. In all of these crises, usually the most important thing is to keep the health of the banking. From the history of the banking crises, we can find a common idea about the banking; a healthy banking system is very helpful for the economy to recovery. How to keep the liquidity of banking can be the key question of the banking crises theory. The subprime mortgage credit crisis demonstrates that while financial intermediaries have changed in many ways. However, at root their problem remains the same.Our dissertation includes three parts. In the first part, we examine some properties of the private information equilibrium to preserve stability of the banking system. We discuss the relationship among moral hazard, adverse selection and the banking system stability, and taking the variable of economic shock as given, try to give an answer on what happens to the economics with the moral hazard, adverse selection when the economic shock being. Our results show that under the "moral hazard", the best response to banking stability is constant with the request of maximizing the banking utility function. This keeps the banking system to be stable. However, for the case with the "adverse selection", there is contradiction between the best response to the banking stability and maximal profit goal. This forms the necessity of government supervision.In the second part, we argue the bank's bailouts and the contagion by the interbank market. The bank suffers from the losses when facing the entrepreneur's possible behavior for moral hazard. A bailout by the bank may be optimal, but are all the bailout rules efficient over controlling the moral hazard? There are two rules usually being discussed, debt forgiveness and liquidating by the market. Both of rules can improve the utility of bank, however, a relative long project could make the debt forgiveness undesirable. The results obtained are applied to assess the probability of banking contagion through the interbank market.In the last part, we argue the effectiveness of banking bailouts; find that the banking bailouts cannot resolve the uncertainty by the withdrawers.