Risk management is a central function of banks. Our model examines how banks use this ability to shift risk away from entrepreneurs. To create incentive compatibility, banks must assume some of the entrepreneurial risks, e. g. by underwriting OTC hedging contracts or granting loans. The arising bankruptcy risk causes potential contagion. A conflict of interest emerges because banks prefer a div...

While development of sound, market-oriented banking systems is fundamental to the transition, bank intermediation remains stunted after a decade or more of reform. This paper examines the impact of banking and enterprise reforms and other factors on banking development in transition economies at both the aggregate level and that of individual banks. A unique contribution of the paper is the ana...