Informational contagion of bank runs in a third-generation crisis model

This paper highlights the international spread of bank runs in a third-generation model of financial crises through an informational channel. Banks' short-term liabilities include loans granted by foreign creditors who have imperfect information about the liquidation costs of banks' assets. A bank panic in a country induces lenders to downgrade early-liquidation yields in other countries, and thus to require higher interest rates to enable their banks to roll over their maturing debt. Those banks become therefore more prone to self-fulfilling depositors' runs. The paper then studies the effect on contagion of increased transparency and bailouts.