Panetti, Ettore (2011): Unobservable savings, risk sharing and default in the financial system.
Download (307kB) | Preview
In the present paper, I analyze how unobservable savings affect risk sharing and bankruptcy decisions in the financial system. I extend the Diamond and Dybvig (1983) model of financial intermediation to an environment with heterogeneous intermediaries, aggregate uncertainty and agents' hidden borrowing and lending. I demonstrate three results. First, unobservability imposes a burden on financial intermediaries, that in equilibrium are not able to offer a banking contract that balances insurance and incentive motivations. Second, unobservable markets do induce default, but only as long as insurance markets are incomplete. Therefore, their presence is not a rationale for government intervention on bankruptcy via "resolution regimes". Third, even in case of complete markets the competitive equilibrium is inefficient, and a simple tier-1 capital ratio similar to the one proposed in the Basel III Accord implements the efficient allocation.
|Item Type:||MPRA Paper|
|Original Title:||Unobservable savings, risk sharing and default in the financial system|
|Keywords:||financial intermediation, hidden savings, bankruptcy, insurance, optimal regulation|
|Subjects:||E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy
G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation
G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages
|Depositing User:||Ettore Panetti|
|Date Deposited:||14. Mar 2011 21:14|
|Last Modified:||31. Dec 2015 06:06|
Acharya, V. V., H. Mehran, and A. Thakor (2010, September). Caught between Scylla and Charybdis? Regulating Bank Leverage When There Is Rent Seeking and Risk Shifting.
Ales, L. and P. Maziero (2010, October). Non-Exclusive Dynamic Contracts, Competition, and the Limits of Insurance. mimeo.
Allen, F. and D. Gale (2004, July). Financial Intermediaries and Markets. Econometrica 72 (4), 1023–1061.
Bank for International Settlements (2010, July). Countercyclical capital buﬀer proposal. Technical report, Bank for International Settlements.
Cole, H. and N. Kocherlakota (2001). Eﬃcient Allocations with Hidden Income and Hidden Storage. Review of Economic Studies 68 (3), 523–542.
Diamond, D. W. and P. H. Dybvig (1983). Bank Runs, Liquidity and Deposit Insurance. Journal of Political Economy 91, 401–419.
Farhi, E., M. Golosov, and A. Tsyvinski (2009). A Theory of Liquidity and Regulation of Financial Intermediation. Review of Economic Studies 76, 973–992.
Farhi, E. and J. Tirole (2010). Collective Moral Hazard, Maturity Mismatch and Systemic Bailouts. Forthcoming.
Golosov, M. and A. Tsyvinski (2007). Optimal Taxation with Endogenous Insurance Markets. Quarterly Journal of Economics 122, 487–534.
Gorton, G. (1988). Banking Panics and Business Cycles. Oxford Economic Papers 40 (3), 751–781.
Hanson, S., A. K. Kashyap, and J. C. Stein (2010, July). A Macroprudential Approach to Financial Regulation. mimeo.
Kocherlakota, N. (2010). The New Dynamic Public Finance. Princeton University Press.
Panetti, E. (2011, February). Financial Liberalization and Contagion With Unobservable Contracts. mimeo.
Pozsar, Z., T. Adrian, A. Ashcraft, and H. Boesky (2010, July). Shadow Banking. Staﬀ Report 458, Federal Reserve Bank of New York.