A dynamic model with credit under limited commitment is constructed, in which limited memory can weaken the effects of punishment for default. This creates an endogenous role for government debt in credit markets, and the economy can be non-Ricardian. Default can occur in equilibrium, and government debt essentially plays a role as collateral and thus improves borrowers' incentives. The provision of government debt acts to discourage default, whether default occurs in equilibrium or not. * These are our own views, and not necessarily those of the Federal Reserve Banks of Richmond and St. Louis, or the Board of Governors of the Federal Reserve System. We thank seminar and conference participants at the Chicago Federal Reserve Bank Workshop on Money, Banking, and Payments, the 2012 SED Meetings, along with 3 anonymous referees and the editor Dimitri Vayanos, for their helpful comments and suggestions.

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractThe events from the 2007-2009 …nancial crisis have raised concerns that the failure of large …nancial institutions can lead to destabilizing …re sales of assets. The risk of …re sales is related to exemptions from bankruptcy's automatic stay provision enjoyed by a number of …nancial contracts, such as repo. An automatic stay prohibits collection actions by creditors against a bankrupt debtor or his property. It prevents a creditor from liquidating collateral of a defaulting debtor since collateral is a lien on the debtor's property. In this paper, we construct a model of repo transactions, and consider the e¤ects of changing the bankruptcy rule regarding the automatic stay on the activity in repo and real investment markets. We …nd that exempting repos from the automatic stay is bene…cial for creditors who that hold the borrowers'collateral. Although the exemption may increase the size of the repo market by enhancing the liquidity of collateral, it can also lead to subsequent damaging …re sales that are associated with reductions in real investment activity. Hence, policy makers face a trade-o¤ between the bene…ts of investment activity and the bene…ts of liquid markets for collateral.

Abstract:Many recent institutional reforms of the financial system have relied on the introduction of an explicit scheme of Deposit Insurance. This instrument aims at two main targets, contributing to systemic stability and protecting depositors. However it may also affect the interest rate spread in the banking system, which can be viewed as an indicator of market power in this financial segment. This paper provides an empirical investigation of the effect of deposit insurance and other institutional and economic variables on bank interest rates across countries. We find that deposit insurance increases the lending borrowing spread in banking. The main effect seems to arise not from the deposit side though, but from an increase in the lending rate. We interpret this result as evidence of the presence of moral hazard problems related to this instrument. We also find that higher quality of institutions is associated with lower spreads, thus contributing to eroding sources of market power in the banking sector.