Banking with Contingent Contracts, Macroeconomic Risks, and Banking Crises

Arbeitspapier

We examine banking competition when deposit or loan contracts contingent on macroeconomic shocks become feasible. We show that the risk allocation is efficient, provided that banks are not bailed out. In this case, banks may shift part of the risk to depositors. The private sector insures the banking sector and banking crises are avoided. In contrast, when banks are bailed out, depositors receive non-contingent contracts with high interest rates, while entrepreneurs obtain loan contracts that demand high repayment in good times and low repayment 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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Economics Working Paper Series ; No. 08/93

Classification and Topics

• Classification: Wirtschaft ; Market Structure, Pricing, and Design: Perfect Competition
• Subject: Financial intermediation ; macroeconomic risks ; state contingent contracts ; banking regulation ; Finanzintermediation ; Kreditgeschäft ; Kreditrisiko ; Bankenkrise ; Wirkungsanalyse ; Bankenregulierung ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Gersbach, Hans
• Event: Veröffentlichung
• (who): ETH Zurich, CER-ETH - Center of Economic Research
• (where): Zurich
• (when): 2008

Further information

• DOI: doi:10.3929/ethz-a-005666540
• Handle: http://hdl.handle.net/10419/171536
• Last update: 10.03.2025, 11:42 AM CET