Safety First: A Theory of Banking

Toni Ahnert, Enrico Perotti and Spyros Terovitis

No 17770, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We propose a safety demand view of banking. Households have a structural preference for safety and heterogeneous self-insurance options, and choose a portfolio of productive and directly control personal assets. Private intermediaries arise endogenously to limit inefficient self insurance, as households with high self-insurance returns invest in bank equity while households with low self-insurance returns hold debt. The conflict over interim risk choices is solved by demandable debt, forcing early liquidation. Our theory rationalizes puzzling empirical findings in household finance, such as large dfferences in risky returns across the wealth distribution. We show that public provision of safety can crowd in the private provision of safety, as safe public debt requires taxing safe income. In contrast, deposit insurance can boost both intermediation and productive investment.

JEL-codes: G11 G21 G28 G51 (search for similar items in EconPapers)
Date: 2022-12
References: Add references at CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP17770 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:17770

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP17770

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().