Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/312798 
Year of Publication: 
2023
Citation: 
[Journal:] Journal of Economics [ISSN:] 1617-7134 [Volume:] 141 [Issue:] 2 [Publisher:] Springer Vienna [Place:] Vienna [Year:] 2023 [Pages:] 137-162
Publisher: 
Springer Vienna, Vienna
Abstract: 
Recent evidence suggests that banks are interconnected through investment externalities among their borrowers. We study how such investment externalities affect the ability of unregulated, competitive banks to facilitate risk sharing among bank depositors, adapting a canonical model of banks as creators of liquidity subject to fundamental risks to bank returns. Failures occur when banks become insolvent. We find that investment externalities render fundamental risks to bank returns endogenous, risk sharing among depositors inefficient, probabilities of bank failures too high, and payouts to depositors in the event of a bank failure too low. These effects arise because productivity is too low in the presence of investment externalities. Minimum liquidity standards and bank bailouts dampen productivity further.
Subjects: 
Insolvency risk
Aggregate productivity
Bank bailouts
JEL: 
G21
G28
G33
O47
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Article
Document Version: 
Published Version

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