Contingent contracts in banking : insurance or risk magnification?
- We examine whether the economy can be insured against banking crises with deposit and loan contracts contingent on macroeconomic shocks. We study banking competition and show that the private sector insures the banking system through such contracts, and banking crises are avoided, provided that failed banks are not bailed out. When risks are large, banks may shift part of them to depositors. In contrast, when banks are bailed out by the next generation, 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 generate large macroeconomic risks for future generations, even if the underlying productivity risk is small or zero. We conclude that a joint policy package of orderly default procedures and contingent contracts is a promising way to reduce the threat of a fragile banking system.
Author: | Hans GersbachGND |
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URN: | urn:nbn:de:hebis:30:3-480039 |
URL: | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3289938 |
Parent Title (English): | Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 612 |
Series (Serial Number): | CFS working paper series (612) |
Publisher: | Center for Financial Studies |
Place of publication: | Frankfurt, M. |
Document Type: | Working Paper |
Language: | English |
Year of Completion: | 2018 |
Year of first Publication: | 2018 |
Publishing Institution: | Universitätsbibliothek Johann Christian Senckenberg |
Release Date: | 2018/11/29 |
Tag: | Financial intermediation; banking regulation; macroeconomic risks; state-contingent contracts |
Issue: | November 2018 |
Page Number: | 41 |
HeBIS-PPN: | 439817137 |
Institutes: | Wirtschaftswissenschaften / Wirtschaftswissenschaften |
Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS) | |
Dewey Decimal Classification: | 3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft |
Sammlungen: | Universitätspublikationen |
Licence (German): | Deutsches Urheberrecht |