Bad Banks Choking Good Banks: Simulating Balance Sheet Contagion

Stephen Kinsella, Saed Shawqi Khalil
2011 Social Science Research Network  
We investigate the propagation of contagion through banks' balance sheets in a two-country model. We simulate an increase in non-performing loans in one bank, and study the effects on other banks and the macro-economy of each country. We show that credit crunches destabilize each economy in the short run and in the long run reduce potential output. We quantify this loss.
doi:10.2139/ssrn.1939211 fatcat:k5dccbwjjzdlbgubd3dmk644t4