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Financial Intermediation with Contingent Contracts and Macroeconomic Risks

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Gersbach, Hans

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

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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This page was last updated on 2009-12-21.

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