Liquidity Coinsurance, Moral Hazard, and Financial Contagion

Journal of Finance - Tập 62 Số 5 - Trang 2275-2302 - 2007
Sandro Brusco1, Fabio Castiglionesi2
1Stony Brook University
2Autonomous University of Barcelona.

Tóm tắt

ABSTRACTWe study the propagation of financial crises among regions in which banks are protected by limited liability and may take excessive risk. The regions are affected by negatively correlated liquidity shocks, so liquidity coinsurance is Pareto improving. The moral hazard problem can be solved if banks are sufficiently capitalized. Under autarky a limited amount of capital is sufficient to prevent risk‐taking, but when financial markets are open capital becomes insufficient. Thus, bankruptcy occurs with positive probability and the crisis spreads to other regions via financial linkages. Opening financial markets is nevertheless Pareto improving; consumers benefit from liquidity coinsurance, although they pay the cost of excessive risk‐taking.

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Thông tin xuất bản

Journal of Finance

Tập 62 Số 5

2275-2302

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