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Financial Institutions in Transition: Banks, Markets, and the Allocation of Risks in an Economy

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  • Martin Hellwig

Abstract

This paper discusses the role of banks and markets in the allocation of risks in an economy. Starting from a discussion of risk allocations in the Arrow-Debreu model, it criticizes the view that banks and markets are substitutes. Instead it is argued that markets are made by intermediaries and intermediaries in turn rely on - interbank - markets for risk management. The analysis raises the question why traditional contractual arrangements in banking leave banks subject to risks associated with macro shocks, which are in principle contractable in an incentive-compatible way. Several explanations for this phenomenon are discussed.

Suggested Citation

  • Martin Hellwig, 1998. "Financial Institutions in Transition: Banks, Markets, and the Allocation of Risks in an Economy," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 154(1), pages 328-328, March.
    • Handle: RePEc:mhr:jinste:urn:sici:0932-4569(199803)154:1_328:fiitbm_2.0.tx_2-4
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    Citations

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    Cited by:

    1. Philippe DULBECCO & Jean-Pierre ALLEGRET & COURBIS, 1999. "Financial Liberalisation and Stability of the Financial System in Emerging Markets: the institutional dimension of financial crises," Working Papers 199918, CERDI.
    2. Algieri, Bernardina & Leccadito, Arturo, 2017. "Assessing contagion risk from energy and non-energy commodity markets," Energy Economics, Elsevier, vol. 62(C), pages 312-322.
    3. Entrop, O. & von la Hausse, L. & Wilkens, M., 2017. "Looking beyond banks’ average interest rate risk: Determinants of high exposures," The Quarterly Review of Economics and Finance, Elsevier, vol. 63(C), pages 204-218.
    4. Gerhard Illing, 2007. "Financial Stability and Monetary Policy – A Framework," CESifo Working Paper Series 1971, CESifo.
    5. Ettore Panetti, 2017. "A Theory of Bank Illiquidity and Default with Hidden Trades," Review of Finance, European Finance Association, vol. 21(3), pages 1123-1157.
    6. Richter Toni, 2021. "Bankenwettbewerb und die Stabilität von Finanzsektoren: Nur eine Frage der Messmethode?," Zeitschrift für Wirtschaftspolitik, De Gruyter, vol. 70(1), pages 1-36, May.
    7. Shy, Oz & Stenbacka, Rune & Yankov, Vladimir, 2016. "Limited deposit insurance coverage and bank competition," Journal of Banking & Finance, Elsevier, vol. 71(C), pages 95-108.
    8. Jan Pieter Krahnen, 2005. "Der Handel von Kreditrisiken: Eine neue Dimension des Kapitalmarktes," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 6(4), pages 499-519, November.
    9. Gersbach, Hans & Haller, Hans & Zelzner, Sebastian, 2023. "Enough liquidity with enough capital - And vice versa?," CFS Working Paper Series 714, Center for Financial Studies (CFS).
    10. Felix Rösel, 2015. "Hoch gepokert, hoch verschuldet: Kurzfristige Fremdwährungskredite der Kommunen inDeutschland," ifo Dresden berichtet, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 22(01), pages 43-46, February.
    11. Zimper Alexander, 2013. "Optimal Liquidity Provision Through a Demand Deposit Scheme: The Jacklin Critique Revisited," German Economic Review, De Gruyter, vol. 14(1), pages 89-107, February.
    12. Nderitu Kingori, 2016. "Market Structure, Macroeconomic Shocks, and Banking Risk in Kenya," Econometric Research in Finance, SGH Warsaw School of Economics, Collegium of Economic Analysis, vol. 1(2), pages 81-113, December.
    13. Alaa Alaabed & Mansur Masih & Abbas Mirakhor, 2016. "Investigating risk shifting in Islamic banks in the dual banking systems of OIC member countries: An application of two-step dynamic GMM," Risk Management, Palgrave Macmillan, vol. 18(4), pages 236-263, December.
    14. Hakenes, Hendrik, 2003. "Banks as delegated risk managers," Papers 03-13, Sonderforschungsbreich 504.
    15. Ludwig Hausse & Martin Rohleder & Marco Wilkens, 2016. "Systemic interest rate and market risk at US banks," Journal of Business Economics, Springer, vol. 86(8), pages 933-961, November.

    More about this item

    JEL classification:

    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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