Risky Collateral and Deposit Insurance
AbstractThis paper provides a new rationalization for deposit insurance and systemic disintermediations. I consider an environment in which borrowers face no penalty for failing to repay obligations except the loss of their collateral. I assume that this collateral has aggregate risk. For a subset of the exogenous parameters, I demonstrate that an optimal arrangement features deposit insurance. For a strictly smaller set of parameters, it is optimal in some states of the world to have systemic distintermediations and concomitant falls in real output.
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Bibliographic InfoArticle provided by De Gruyter in its journal The B.E. Journal of Macroeconomics.
Volume (Year): 1 (2001)
Issue (Month): 1 (February)
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- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
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