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Financial Intermediation with Contingent Contracts and Macroeconomic Risks

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  • Gersbach, Hans

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 provided 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.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4735.

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Date of creation: Nov 2004
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Handle: RePEc:cpr:ceprdp:4735

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Keywords: banking regulation; financial intermediation; macroeconomic risks; state contingent contracts;

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Cited by:
  1. Hans Gersbach & Volker Hahn, 2009. "Banking-on-the-Average Rules," CER-ETH Economics working paper series 09/107, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.

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