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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.

Suggested Citation

  • Gersbach, Hans, 2004. "Financial Intermediation with Contingent Contracts and Macroeconomic Risks," CEPR Discussion Papers 4735, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:4735
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    Cited by:

    1. Hans Gersbach, 2013. "Preventing Banking Crises--with Private Insurance?," CESifo Economic Studies, CESifo Group, vol. 59(4), pages 609-627, December.
    2. Gersbach, Hans, 2009. "Private Insurance Against Systemic Crises?," CEPR Discussion Papers 7342, C.E.P.R. Discussion Papers.
    3. 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.
    4. Panayiotis P. Athanasoglou & Ioannis Daniilidis, 2011. "Procyclicality in the banking industry: causes, consequences and response," Working Papers 139, Bank of Greece.

    More about this item

    Keywords

    Financial intermediation; Macroeconomic risks; State contingent contracts; Banking regulation;
    All these keywords.

    JEL classification:

    • D41 - Microeconomics - - Market Structure, Pricing, and Design - - - Perfect Competition
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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