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 payoffs 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 Business School - Economics, University of Glasgow in its series Working Papers with number 2013_21.
Date of creation: Nov 2013
Date of revision:
bank runs; contagion; moral hazard; liquidity; random; contracts; monitoring.;
Other versions of this item:
- Chatterji, S. & Ghosal, S., 2013. "Liquidity, moral hazard and bank crises," SIRE Discussion Papers 2013-85, Scottish Institute for Research in Economics (SIRE).
- Chatterji, Shurojit; Ghosal, Sayantan, 2010. "Liquidity, moral hazard and bank crises," CAGE Online Working Paper Series 27, Competitive Advantage in the Global Economy (CAGE).
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-12-06 (All new papers)
- NEP-BAN-2013-12-06 (Banking)
- NEP-CBA-2013-12-06 (Central Banking)
- NEP-CTA-2013-12-06 (Contract Theory & Applications)
- NEP-MAC-2013-12-06 (Macroeconomics)
- NEP-MON-2013-12-06 (Monetary Economics)
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