Financial Intermediation with Contingent Contracts and Macroeconomic Risks

Hans Gersbach

No 4735, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We examine financial intermediation when banks can offer deposit or loan contracts contingent on macroeconomic shocks. We show that the risk allocation is efficient provided there is no workout of banking crises. In this case, banks will shift part of the risk to depositors. In contrast, under a workout of banking crises, depositors receive non-contingent contracts with high interest rates while entrepreneurs obtain loan contracts that demand a high repayment in good times and little in bad times. As a result, the present generation overinvests and banks create large macroeconomic risks for future generations, even if the underlying risk is small or zero.

Keywords: Financial intermediation; Macroeconomic risks; State contingent contracts; Banking regulation (search for similar items in EconPapers)
JEL-codes: D41 E40 G20 (search for similar items in EconPapers)
Date: 2004-11
New Economics Papers: this item is included in nep-fin and nep-mac
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Citations: View citations in EconPapers (4)

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