Optimal Bank Contributions and Household Risk-Aversion

44 Pages Posted: 22 Jul 2021

Date Written: July 19, 2021

Abstract

We study bank contributions that ex ante fund government guarantees supported by a fiscal backstop in a general equilibrium setting where banks intermediate between risk-averse households and state-contingent investments. We offer an analytical characterization of optimal bank contributions as a function of household risk-aversion and guarantees. Showing that higher risk-aversion expedites the way bank contributions internalize guarantees' boost of household risk-taking, we establish a non-trivial relationship between optimal bank contributions and household risk-aversion: Higher risk-aversion optimally induces higher contributions when guarantees exceed a threshold; otherwise, higher contributions shall be observed in economies with less risk-averse households.

Keywords: bank contributions, risk-aversion, government guarantees, fiscal backstop, general equilibrium

JEL Classification: D53, G28, H21

Suggested Citation

Papageorgiou, Stylianos, Optimal Bank Contributions and Household Risk-Aversion (July 19, 2021). Available at SSRN: https://ssrn.com/abstract=3889332 or http://dx.doi.org/10.2139/ssrn.3889332

Stylianos Papageorgiou (Contact Author)

University of Cyprus ( email )

Cyprus

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