Copyright (c) 2008 All rights reserved. http://works.bepress.com/nkocher Recent documents in Narayana R Kocherlakota en-us Thu, 03 Jan 2008 12:10:44 PST 3600 http://works.bepress.com/nkocher/1 http://works.bepress.com/nkocher/1 Thu, 25 Jan 2007 12:26:51 PST This paper provides a new rationalization for deposit insurance and systemic disintermediations. I consider an environment in which borrowers face no penalty for failing to repay obligations except the loss of their collateral. I assume that this collateral has aggregate risk. For a subset of the exogenous parameters, I demonstrate that an optimal arrangement features deposit insurance. For a strictly smaller set of parameters, it is optimal in some states of the world to have systemic distintermediations and concomitant falls in real output. Narayana R. Kocherlakota G21