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...

This paper studies the question to what extent premia for macroeconomic risks in banking are sufficient to avoid banking crises. We investigate a competitive banking system embedded in an overlapping generation model subject to repeated macroeconomic shocks. We show that even if banks fully...

We investigate a banking system subject to repeated macroeconomic shocks and show that without deposit rate control, the banking system collapses with certainty. Any initial level of reserves will delay the collapse but not avoid it. Even without a banking collapse, the economy still converges...

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...

This paper provides a macroeconomic perspective for government interventions in banking crises. Such crises occur when a large number of banks fail to meet capital requirements or are insolvent. Using a macroeconomic model with financial intermediation, our analysis suggests that strict...

In a general equilibrium model we examine the optimal allocation of equity and debt across banks and industrial firms when both are plagued by incentive problems and firms can borrow from banks. Competition among banks will not result in a socially efficient level of equity. Imposing capital...

In this paper, we provide an economy-wide perspective on equity and debt across banks and industrial firms when both are faced with incentive problems and equity is scarce. Increasing bank equity may mitigate the bank-level moral hazard but exacerbates the firm-level moral hazard due to the...

Insurance contracts contingent on macroeconomic shocks or on average bank capital could be a way of insuring against systemic crises. With insurance, banks are recapitalized when negative events would otherwise cause a write down of capital or even bank insolvency. In a simple model we...

We consider the business strategy of some banks that provide relationship loans (where they have loan origination and monitoring advantages relative to capital markets) with core deposit funding (where they can pass along the benefit of a sticky price on deposits). These quot;traditional...