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Financial Intermediation and the Creation of Macroeconomic Risks Author info | Abstract | Publisher info | Download info | Related research | Statistics Hans Gersbach ()
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We examine financial intermediation when banks can offer deposit or loan contracts contingent on macroeconomic shocks. We show that the risk allocation is efficient if there is no workout of banking crises. In this case, banks will shift part of the risk to depositors. In contrast, under a workout of banking crises, depositors receive non-contingent contracts with high interest rates while entrepreneurs obtain loan contracts that demand a high repayment in good times and little in bad times. As a result, the present generation overinvests and banks create large macroeconomic risks for future generations, even if the underlying risk is small or zero. This provides a new justification for capital requirements.
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number
CESifo Working Paper No. 695.
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Date of creation: 2002Date of revision:
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Keywords: financial intermediation ; macroeconomic risks ; state contingent contracts ; banking regulation ; Find related papers by JEL classification: D41 - Microeconomics - - Market Structure and Pricing - - - Perfect Competition E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General G20 - Financial Economics - - Financial Institutions and Services - - - General
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