Liquidity, moral hazard and bank crises

S.Chatterji and Sayantan Ghosal

Working Papers from Business School - Economics, University of Glasgow

Abstract: Bank crises, by interrupting liquidity provision, have been viewed as resulting in welfare losses. In a model of banking with moral hazard, we show that second best bank contracts that improve on autarky ex ante require costly crises to occur with positive probability at the interim stage. When bank payoffs are partially appropriable, either directly via imposition of nes or indirectly by the use of bank equity as a collateral, we argue that an appropriately designed ex-ante regime of policy intervention involving conditional monitoring can prevent bank crises.

Keywords: bank runs; contagion; moral hazard; liquidity; random; contracts; monitoring. (search for similar items in EconPapers)
JEL-codes: D82 G21 (search for similar items in EconPapers)
Date: 2013-11
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cta, nep-mac and nep-mon
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Related works:
Working Paper: Liquidity, moral hazard and bank crises (2013)
Working Paper: Liquidity, moral hazard and bank crises (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:gla:glaewp:2013_21

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