Working Paper: CEPR ID: DP17770
Authors: Toni Ahnert; Enrico Perotti; Spyros Terovitis
Abstract: We propose a safety demand view of banking. Households have a structural preference for safety and heterogeneous self-insurance options, and choose a portfolio of productive and directly control personal assets. Private intermediaries arise endogenously to limit inefficient self insurance, as households with high self-insurance returns invest in bank equity while households with low self-insurance returns hold debt. The conflict over interim risk choices is solved by demandable debt, forcing early liquidation. Our theory rationalizes puzzling empirical findings in household finance, such as large dfferences in risky returns across the wealth distribution. We show that public provision of safety can crowd in the private provision of safety, as safe public debt requires taxing safe income. In contrast, deposit insurance can boost both intermediation and productive investment.
Keywords: safe assets; demandable debt; intermediation
JEL Codes: G11; G21; G28; G51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher self-insurance returns (G52) | investment in bank equity (O16) |
| lower self-insurance returns (G52) | holding debt (H63) |
| conflict over risk choices (D81) | demandable debt (H63) |
| demandable debt (H63) | early liquidation of risky assets (G33) |
| public provision of safety (H42) | crowd in private safety provision through deposit insurance (G28) |
| deposit insurance (G28) | increase equilibrium safe rate (D53) |
| deposit insurance (G28) | enhance resource allocation (D61) |