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Financial Intermediation and the Creation of Macroeconomic Risks

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Author Info
Hans Gersbach ()

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Abstract

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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Publisher Info
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: 2002
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Handle: RePEc:ces:ceswps:_695

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Related research
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

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Williamson, Stephen D, 1987. "Financial Intermediation, Business Failures, and Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 95(6), pages 1196-1216, December. [Downloadable!] (restricted)
  2. Hellwig, Martin, 1997. "Banks, Markets, and the Allocation of Risks in an Economy," Sonderforschungsbereich 504 Publications 97-35, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim.
  3. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March. [Downloadable!] (restricted)
  4. Robert Townsend, 1979. "Optimal contracts and competitive markets with costly state verification," Staff Report 45, Federal Reserve Bank of Minneapolis. [Downloadable!]
    Other versions:
  5. Repullo, Rafael & Suarez, Javier, 1998. "Monitoring, Liquidation, and Security Design," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 11(1), pages 163-87.
    Other versions:
  6. Uhlig, H., 1995. "Transition and Financial Collapse," Discussion Paper 66, Tilburg University, Center for Economic Research. [Downloadable!]
    Other versions:
  7. Yanelle, Marie-Odile, 1997. "Banking Competition and Market Efficiency," Review of Economic Studies, Blackwell Publishing, vol. 64(2), pages 215-39, April. [Downloadable!] (restricted)
  8. Gersbach, Hans & Uhlig, Harald, 1997. "Debt Contracts, Collapse and Regulation as Competition Phenomena," CEPR Discussion Papers 1742, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  9. Martin Hellwig, 1995. "Systemic Aspects of Risk Management in Banking and Finance," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 131(IV), pages 723-737, December. [Downloadable!]
  10. Franklin Allen & Douglas Gale, 1995. "Financial Markets, Intermediaries, and Intertemporal Smoothing," Center for Financial Institutions Working Papers 95-02, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
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  11. Kiyotaki, Nobuhiro & Moore, John, 1997. "Credit Cycles," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 211-48, April.
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  12. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Blackwell Publishing, vol. 51(3), pages 393-414, July. [Downloadable!] (restricted)
  13. Hellwig Martin F., 1995. "The Assessment of Large Compounds of Independent Gambles," Journal of Economic Theory, Elsevier, vol. 67(2), pages 299-326, December. [Downloadable!] (restricted)
  14. Bhattacharya, Sudipto & Boot, Arnoud W A & Thakor, Anjan V, 1998. "The Economics of Bank Regulation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(4), pages 745-70, November.
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  15. Holmstrom, Bengt & Tirole, Jean, 1997. "Financial Intermediation, Loanable Funds, and the Real Sector," The Quarterly Journal of Economics, MIT Press, vol. 112(3), pages 663-91, August.
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  16. Thomas F. Hellmann & Kevin C. Murdock & Joseph E. Stiglitz, 2000. "Liberalization, Moral Hazard in Banking, and Prudential Regulation: Are Capital Requirements Enough?," American Economic Review, American Economic Association, vol. 90(1), pages 147-165, March. [Downloadable!] (restricted)
  17. Blum, Jurg & Hellwig, Martin, 1995. "The macroeconomic implications of capital adequacy requirements for banks," European Economic Review, Elsevier, vol. 39(3-4), pages 739-749, April. [Downloadable!] (restricted)
  18. Suarez, Javier & Sussman, Oren, 1997. "Endogenous Cycles in a Stiglitz-Weiss Economy," Journal of Economic Theory, Elsevier, vol. 76(1), pages 47-71, September. [Downloadable!] (restricted)
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  19. Bhattacharya Sudipto & Thakor Anjan V., 1993. "Contemporary Banking Theory," Journal of Financial Intermediation, Elsevier, vol. 3(1), pages 2-50, October. [Downloadable!] (restricted)
  20. Williamson, Stephen D., 1986. "Costly monitoring, financial intermediation, and equilibrium credit rationing," Journal of Monetary Economics, Elsevier, vol. 18(2), pages 159-179, September. [Downloadable!] (restricted)
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  21. Gorton, Gary & Kahn, James, 2000. "The Design of Bank Loan Contracts," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 13(2), pages 331-64.
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Jan Pieter Krahnen, 2005. "Der Handel von Kreditrisiken: Eine neue Dimension des Kapitalmarktes," CFS Working Paper Series 2005/05, Center for Financial Studies. [Downloadable!]
    Other versions:
  2. Guenter Franke & Jan Pieter Krahnen, 2005. "Default Risk Sharing Between Banks and Markets: The Contribution of Collateralized Debt Obligations," NBER Working Papers 11741, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Goetz von Peter, 2004. "Asset Prices and Banking Distress: A Macroeconomic Approach," Finance 0411034, EconWPA. [Downloadable!]
    Other versions:
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