Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/76099 
Authors: 
Year of Publication: 
2002
Series/Report no.: 
CESifo Working Paper No. 695
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
We examine financial intermediation when banks can offer deposit or loan contracts contingent on macroeconomic shocks. We show that the risk allocation is efficient if there is no workout of banking crises. In this case, banks will shift part of the risk to depositors. In contrast, under a workout of banking crises, depositors receive non-contingent contracts with high interest rates while entrepreneurs obtain loan contracts that demand a high repayment in good times and little 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. This provides a new justification for capital requirements.
Subjects: 
financial intermediation
macroeconomic risks
state contingent contracts
banking regulation
Document Type: 
Working Paper
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