On the Causes of Overlending: Are Guarantees on Deposits the Culprit?

Mariassunta Giannetti

No 4055, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Conventional wisdom holds that overlending problems and banking crises in open economies are provoked by investor moral hazard, which is caused in turn by guarantees on deposits. This Paper shows that this is not necessarily the case: guarantees on deposits may even limit the losses banks accumulate. In the model, banks may rationally accumulate bad loans if international investors have incomplete information on firm profitability and initially provide funds at low cost. In equilibrium, international investors rationally require a risk premium and banks stop renewing bad loans, only when a substantial amount of losses has been accumulated. This feature of the equilibrium does not depend on whether or not there are guarantees on deposits. Transparency and bond market development can eliminate overlending problems and prevent banking crises.

Keywords: Banking crises; Bank-firm relationships; Guarantees on deposits; transparency; Bond markets (search for similar items in EconPapers)
JEL-codes: F34 G21 G28 (search for similar items in EconPapers)
Date: 2003-09
New Economics Papers: this item is included in nep-cfn, nep-mfd and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://cepr.org/publications/DP4055 (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:4055

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP4055

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 ().