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Liquidity, moral hazard and bank crises

Listed author(s):
  • Chatterji, S.
  • Ghosal, S.

Bank 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 fines 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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File URL: http://hdl.handle.net/10943/521
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Paper provided by Scottish Institute for Research in Economics (SIRE) in its series SIRE Discussion Papers with number 2013-85.

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Date of creation: 2013
Handle: RePEc:edn:sirdps:521
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