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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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    References listed on IDEAS

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    1. Baker, Malcolm & Wurgler, Jeffrey, 2013. "Behavioral Corporate Finance: An Updated Survey," Handbook of the Economics of Finance, Elsevier.
    2. Hart, Oliver, 1995. "Corporate Governance: Some Theory and Implications," Economic Journal, Royal Economic Society, vol. 105(430), pages 678-689, May.
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    Citations

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    Cited by:

    1. Hakenes, Hendrik, 2003. "Banks as delegated risk managers," Papers 03-13, Sonderforschungsbreich 504.
    2. 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.
    3. 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.
    4. Algieri, Bernardina & Leccadito, Arturo, 2017. "Assessing contagion risk from energy and non-energy commodity markets," Energy Economics, Elsevier, vol. 62(C), pages 312-322.
    5. 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.
    6. Gerhard Illing, 2007. "Financial Stability and Monetary Policy – A Framework," CESifo Working Paper Series 1971, CESifo Group Munich.
    7. 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.
    8. Felix Rösel, 2015. "Hoch gepokert, hoch verschuldet: Kurzfristige Fremdwährungskredite der Kommunen in Deutschland," ifo Dresden berichtet, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 22(01), pages 43-46, February.
    9. 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.

    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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