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Banks, Markets, and the Allocation of Risks in an Economy

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  • Hellwig, Martin

    (Sonderforschungsbereich 504)

Abstract

The paper discusses the role of banks and markets in the allocation of risks in an economy. Starting from a discussion of risk allocation 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

  • Hellwig, Martin, 1997. "Banks, Markets, and the Allocation of Risks in an Economy," Sonderforschungsbereich 504 Publications 97-35, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
    • Handle: RePEc:xrs:sfbmaa:97-35
    Note: It is a pleasure to acknowledge helpful discussions with and comments from Charles Calomiris, James Dow, Thomas Gehrig, Hans Gersbach, and Markus Staub. Financial support from the Deutsche Forschungsgemeinschaft is gratefully acknowledged.
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    Cited by:

    1. Hakenes, Hendrik, 2004. "Banks as delegated risk managers," Journal of Banking & Finance, Elsevier, vol. 28(10), pages 2399-2426, October.
    2. Dwyer Jr., Gerald P. & Samartín, Margarita, 2009. "Why do banks promise to pay par on demand?," Journal of Financial Stability, Elsevier, vol. 5(2), pages 147-169, June.

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