Abstract :
In thepresenceofdepositinsurance,ariseincounterpartyriskmaycauseafreezein
interbankmoneymarkets.Weshowthisinageneralequilibriummodelwithregionally
segmentedbank-basedretailfinancialmarkets,inwhichmoneymarketsfacilitatethe
reallocationoffundsacrossbanksfromdifferentregions.Counterpartyriskcreatesan
asymmetrybetweenbanksinsavings-richregions,whichremainmarginallyfinanced
by theabundantregionalinsureddeposits,andinsavings-poorregions,whichhaveto
pay largespreadsinmoneymarkets.Thisasymmetrydistortstheaggregateallocation
of creditand,inthepresenceofdemandexternalities,cancauselargeoutputlosses.
