This paper models an economy in which risk-averse savers and risk-neutral entrepreneurs make investment decisions. Aggregate investment in high-yielding risky projects is maximized when risk-neutral agents bear all nondiversifiable risks. A role of banks is to assume nondiversifiable risks by...

This paper examines the effects of the estimated probability of bank failure on the growth rates of large time deposits and interest rates on those deposits. While riskier banks paid higher interest rates, they attracted less large time deposits in the second half of the 1980s. These results...

This paper recognizes two main factors that cause the capital requirement to affect the weighted average cost of capital and hence the investment behavior of banks: underpriced debt resulting from the deposit insurance and information asymmetry between managers and the stock market. For a bank...