TY  - UNPD
A1  - Gersbach, Hans
T1  - Contingent contracts in banking : insurance or risk magnification?
T2  - Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 612
N2  - 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.
T3  - CFS working paper series - 612 
KW  - Financial intermediation
KW  - macroeconomic risks
KW  - state-contingent contracts
KW  - banking regulation
Y1  - 2018
UR  - http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/48003
UR  - https://nbn-resolving.org/urn:nbn:de:hebis:30:3-480039
UR  - https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3289938
IS  - November 2018
PB  - Center for Financial Studies
CY  - Frankfurt, M.
ER  -