Banks and Markets from an Insurance Perspective

Amaury Goguel () and Maxence Miéra ()
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Amaury Goguel: Université Côte d’Azur
Maxence Miéra: Univ. Lille, UMR 9221 Lille Economie Management (LEM)

Journal of Quantitative Economics, 2023, vol. 21, issue 4, No 10, 943-957

Abstract: Abstract This article aims to clarify the analogy between contingent claims in a complete market and banking contracts in a capitalized financial intermediary that combines both deposit and equity. It brings together insurance theory and financial intermediation theory in a synthetic model by focusing on the risk allocation function rather than on a particular kind of institutional arrangement. The model includes both idiosyncratic liquidity risk and aggregate uncertainty on asset return, and it focuses on risk allocation in a perfect information setting from an insurance perspective. This article then highlights that equity contracts are equivalent to state-contingent claims in the aggregate-risk shifting, that deposit contracts are equivalent to type-contingent claims in the idiosyncratic-risk mutualization, and that banks and markets both implement the optimal allocation by simply using different mechanisms.

Keywords: Banks; Markets; Insurance; D53; G21; G22 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s40953-023-00365-8

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