Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/171536
Authors: 
Gersbach, Hans
Year of Publication: 
2008
Series/Report no.: 
Economics Working Paper Series 08/93
Abstract: 
We examine banking competition when deposit or loan contracts contingent on macroeconomic shocks become feasible. We show that the risk allocation is efficient, provided that banks are not bailed out. In this case, banks may shift part of the risk to depositors. The private sector insures the banking sector and banking crises are avoided. In contrast, when banks are bailed out, depositors receive non-contingent contracts with high interest rates, while entrepreneurs obtain loan contracts that demand high repayment in good times and low repayment in bad times. As a result, the present generation overinvests, and banks create large macroeconomic risks for future generations, even if the underlying risk is small or zero.
Subjects: 
Financial intermediation
macroeconomic risks
state contingent contracts
banking regulation
JEL: 
D41
E4
G2
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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