Bank crises, by interrupting liquidity provision, have been viewed as resulting in welfare losses. In a model of banking with moral hazard, we show that second best bank contracts that improve on autarky ex
ante require costly crises to occur with positive probability at the interim stage. When bank payo§s are partially appropriable, either directly via imposition of Önes or indirectly by the use of bank equity as a collateral, we
argue that an appropriately designed ex-ante regime of policy intervention involving conditional monitoring can prevent bank crises
