Financial Intermediation and the Creation of Macroeconomic Risks

31 Pages Posted: 27 May 2002

See all articles by Hans Gersbach

Hans Gersbach

ETH Zurich - CER-ETH -Center of Economic Research; IZA Institute of Labor Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Date Written: April 2002

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 if 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. This provides a new justification for capital requirements.

Keywords: Financial Intermediation, Macroeconomic Risks, State Contingent Contracts, Banking Regulation

JEL Classification: D41, E4, G2

Suggested Citation

Gersbach, Hans, Financial Intermediation and the Creation of Macroeconomic Risks (April 2002). Available at SSRN: https://ssrn.com/abstract=310547 or http://dx.doi.org/10.2139/ssrn.310547

Hans Gersbach (Contact Author)

ETH Zurich - CER-ETH -Center of Economic Research ( email )

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CESifo (Center for Economic Studies and Ifo Institute)

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Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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