Liquidity, moral hazard and bank crises
AbstractBank crises, by interrupting liquidity provision, have been viewed as resulting in welfare losses. In a model of banking with moral hazard, we show that second best bank contracts that improve on autarky ex-ante require costly crises to occur with positive probability at the interim stage. When bank payo¤s are partially appropriable, either directly via imposition of …nes or indirectly by the use of bank equity as a collateral, we argue that an appropriately designed ex-ante regime of policy intervention involving conditional monitoring can prevent bank crises.
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Bibliographic InfoPaper provided by Competitive Advantage in the Global Economy (CAGE) in its series CAGE Online Working Paper Series with number 27.
Date of creation: 2010
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bank runs; contagion; moral hazard; liquidity; random; contracts; monitoring.;
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