International Banking - 30178

Academic year2024-2025

Topic 3
Liquidity and Systemic risks
 Objectives of Topic 3

• Understand liquidity risk

– Different types
• Liability versus off-balance-sheet
• Panic versus fundamentals
 Implications for the solvency of financial institutions (FIs)

• Understand contagion and systemic risk

– Idiosyncratic risk + propagation
– Aggregate shocks
– 2008financial crisis

Chap. 12 – SC Textbook

2
 Liquidity risk
It is the risk that a sudden increase

• (i) in liability withdrawals or

(ii)in the exercise of OBS commitments

requires a FI to liquidate assets in a short period of time

and at low prices

or (iii) fall in assetvalue

– Example of (i): Unexpected extreme withdrawals due to lack of

confidence by liability holders or fear of bank insolvency
– Example of (ii): Massive useof loan commitments (unused credit
lines)
– Example of (iii): following a burst in asset bubble, the value of the
securities in the FI portfolio lose value

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 Liquidity risk (cont.)
• FI can satisfy liquidity needsin three ways

1) Using cash reserves

2) Borrowing new funds
3) Liquidating (longer term) assets

• In normal times, the first two may beenough

• In bad times, the third is typically needed

– Most serious problem as sale of “illiquid” assets may generate low
prices – “fire sales” (i.e., lower than fair market value)
– It may threaten FI’ssolvency

What is optimal to do and why?

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Liquidity risk from deposit drain - 1
Balance sheet before the drain

5
 Liquidity risk from deposit drain –2
Balance sheet before the drain

Suppose now that there is a deposit drain of 5 so that deposits

fall to 65.

What can the bank do?

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 Liquidity risk from deposit drain - 3
OPTION 1
The bank manager increases borrowed funds by 5 so that the assets
remain 100

Balance sheet before the drain

Balance sheet after the drain

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 Liquidity risk from deposit drain - 4
OPTION 2
The bank manager can usestored cash (assume that, before the drain,
cash was 9)
Balance sheet before the drain

Balance sheet after the drain

 Both sides of the balance sheet contract now! 8

 What is better?
- When is option 1 – increase borrowed funds –
better?
- Pro: it leaves asset side untouched
- Cons: it increases (wholesale) liabilities, thus making the
bank potentially more fragile

- When is option 2 – use cash – better?

- Pro: it does not increaseleverage
- Cons: it decreases the size of balance sheet

There is a trade- off between the two options

 typically, a combinationof the two options is used

- If not enough, the “last option” is to sell assets

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 Liquidity risk from deposit drain -5
Balance sheet before the drain

Suppose now that deposits fall by 15.

What can the bank do if

- Borrowing is not possible

- Assets can be sold but are not liquid (50 cent on each dollar)

???
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 Liquidity risk from deposit drain - 6

Balance sheet after the drain

- Bank usescash but it is notenough

- It has to sell 10 of assetsto cover the remaining 5 needed

- A loss of 5 is incurred

 equity reduces to 5 becauseof the fire-sale

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 To sumup: Liquidity risk from deposit drain

• The bank can deal with asudden increase in liquidity

demands (i.e., drop in deposits) in three ways
1. Increase borrowing
2. Use cash
3. Sell assets

• Between 1 and 2 there is atrade off

• 3 is typically the worst option as it leads to

– Fire sales
– Writes off of assets and thus lower
equity

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 Liquidity risk from loancommitment
Balance sheet before exercise of loan commitment

Suppose now a loan commitment of 5 is exercised.

What can the bank do?

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Liquidity risk from loan commitment - 2
Balance sheet before exercise of loan commitment

Balance sheet after exercise of loan commitment

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 Liquidity risk from loan commitment - 3

OPTION 1
The bank manager can increase borrowed funds
 Both sides of the balance sheet expand

Balance sheet before exercise of loan commitment

Balance sheet after exercise of loan commitment

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Liquidity risk from loan commitment - 4
OPTION 2
The bank manager can usestored cash
 Both sides of the balance sheet remain the same as before the exercise

Balance sheet before exercise of loan commitment

Balance sheet after exercise of loan commitment

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 What is better to do?

- Again: there is atrade-off between the two options

- Note the different changesin the balance sheet now

- Option 1 (borrowing) expandsboth sidesof the

balancesheet

- Option 2 (cash) leavesthe balance sheet unchanged

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 Liquidity risk from lossof assetvalue
Balance sheet before the fall in asset value of securities
Assets Liabilities
Cash 12 Deposits 100
Investment portfolio 50 Borrowed funds 20
Other assets 88 Other liabilities 5
Equity 25
Total 150 Total 150

Following a fire sale, there is drop in value of secturities of 5.

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Liquidity risk from lossof assetvalue-1
Balance sheet after the fall in asset value of securities
Assets Liabilities
Cash 12 Deposits 100
Investment portfolio 45 Borrowed funds 20
Other assets 88 Other liabilities 5
Equity 20
Total 145 Total 145

What happen to the balance sheet?

Equity falls and the size of the bank shrinks.

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 Liquidity risk from lossof assetvalue-2
To adjust the b/s after the fall in asset value of securities

Assets Liabilities
Cash 7 Deposits 100
Investment portfolio 50 Borrowed funds 20
Other assets 88 Other liabilities 5
Equity 20
Total 145 Total 145

Equity has fallen for good.

But the bank can use liquidity to restore the size of the
investment portfolio (collecting more deposits or using cash).

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A financial intermediary
could satisfy liquidity needs

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 Is liquidity risk relevant in practice?

Have we seen massive withdrawals or

a massive use of credit lines?

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Recent examples of massive withdrawals

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 Northern Rock(NR)
• Northern Rock in the summer of 2007

– In previous years, NR balance sheet grewsignificantly

– Lending increased 6.5 times from 1998 to 2007

– This increase was mainly financed by wholesale funding

– When interbankmarket froze, the bank was unable to roll over its
funds

– Bank of England announced theintention to provide emergency

liquidity support to NR (Leakage to BBC)

– After that, the run on retail deposits started!

– Why?Deposits were fullyinsured only up to £2,000, and then up to

90% till the limit of £35,000 23
 Cyprus

March2013

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 Silicon Valley
Bank
-
March 2023

more details later on in the course with Brunella Bruno

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Why do bank runs occur?

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 Bankruns
• “Extreme” withdrawals that force the bank to liquidate its assets
prematurely, thus potentially pushingit into insolvency

• What are they dueto?

– lack of confidence by liability holders  panic runs
– fear on bank solvency  fundamental-driven runs

• How can we understand the mechanism behind arun?

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 Bank runs (cont.)

• Core feature: demand deposit contract. Its characteristics:

– First-come-first-served contract
– A depositor’s place in line determines the amount he/she
will be able to withdraw from a bank
– A depositor either gets paid in full or nothing

• If all depositors withdraw at the same time, the bank does not have
enough cash/liquid assetsto repay themall in full. Why?

• This implies that only acertain proportion of depositors can be

paid back infull

• The bank defaults if it does not repay all depositors in full

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 Bank runs (cont.)
• How does the bank satisfies the increasing demands by withdrawing
depositors?

– Use cash reserves (or other easily marketable assetssuch as short term
government bonds)

– Seek to borrow in interbank markets

– Lastly, sell illiquid assets(e.g. loans)

 But, given these assets are sold at fire sale prices (prices below the
fundamental value of the asset), the proceeds may not be enough to meet
depositors’demandsin full

– When this is the case,the bank becomes insolvent asa consequence

of aliquidity problem!

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 Whencan a runoccur?

• A sound bank can be pushed into insolvency becauseof a

panic run
– For “some reason”, eachdepositor expects the
others to withdraw, and thus rushes to the bank not to
be the last in theline!

• A troubled bank can be pushed into insolvency because of

a fundamental-driven run
– Depositors run becausethey are afraid the bank will
have low returns/bad assets in the future

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 A model of bank run -1
Diamond and Dybvig (JPE 1983) explains why a bank run can occur in a
model with rational expectations.

Here are the main assumptionsof the model:

• Depositors can hold cash;

• In alternative, they can hold a long-term asset which entails costs if

prematurely liquidated (long term bond);

• In alternative, they can hold money in a checkingaccount at the bank; in

caseof unexpected liquidity needs, they can withdraw their money at zero
cost: checking accounts are debt on demand (no maturity)

• Banks supply liquidity (via a checking account =mean of payment); but

they are exposed to the risk of a bank run.

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 A model of bank run -2
There are three periods (t=0,1,2). There exist two type of risk-
averse depositors (for simplicity, we assume they have 1$
each):

– «Early» consumers: they need to withdraw at t=1

– «Late» consumers: they can wait and withdraw at t=2

Crucial ingredient 1: Depositors do not know their own type at

t=0, but they only find out at t=1.

Crucial ingredient 2: banks never observe depositor’s type, not

even when they withdraw, i.e. there is asymmetric information.

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 A model of bank run -3

There are two alternative investment opportunities:

• hold cash: returning just $1 each period

t=0 t=1 t=2

| | | time
Hold1$ in cash Can use 1$ Can use 1$ if not
already used at t=1

• long-term bond: returning R > 1 at t=2 (if

liquidated at t=1, it returns just $1)

t=0 t=1 t=2

| | | time
Invest 1$ in the Can liquidate1$ Get R$ if bond not
long term bond liquidatedat t=1

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 A model of bank run -4

If depositorsknewtheirtype at t=0, whatwould they do?

• Early consumers would be indifferent between cash and

the bond; anyway, theycoulduse 1$ att=1
t=0 t=1 t=2
| | | time
Hold1$ in cash Can use 1$ Can use 1$ if not
alreadyusedat t=1

• Only late consumers would invest in the long-term

bond and use R$ at t=2

t=0 t=1 t=2

| | | time
Invest 1$ in the Can liquidate1$ Get R$ if bond not
long term bond liquidatedat t=1

But no one knowstheirtype at t=0!

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 A model of bank run -5
In this economy, there exist also a bank which provides liquidity in the
following way:

Depositors can deposit their 1$ in a checking account at the bank, and the bank
will return:
• c1> 1 to whoever withdraws at t=1
• c2< R to whoever withdraws att=2

t=0 t=1 t=2

| | | time
Deposit1$ in Can withdraw Can withdraw
the bank c1>1 c2<R$ if not
already withdrawn
at t=1

Provided that c1< c2, late consumers would wait till t=2 to withdraw.

Note: the bank invests all the money collected from depositors in the long
term bond.

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 A model of bank run -6
t=0 t=1 t=2
| | | time
Deposit1$ in Can withdraw Can withdraw
the bank c1>1 c2<R$ if not
already withdrawn
at t=1

This deposit is preferred by all consumers with respect to the cash/bond

world because they are risk averse. Such a contract allows them to smooth
consumption in the two possible states of the world: being early vs being
late.

In fact, it allows early depositors to withdraw at t=1 and consume c1>1

(better than holding cash!), whereas late depositors can withdraw at t=2 and
consume 1<c2<R.
Wait…wouldn’t they rather buy the bond, since it pays R at t=2?

…sure, but they don’t know their type at t=0! They’ll find out later (at t=1).
So the demand deposit allows for a transfer of resources between the
“potentially late me” at t=2 and the “potentially early me” at t=1
smoothing! It works like an insurance.

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 A model of bank run -7
Notice that the bank neverobservesthe type of depositor who comes at the
branch, but only knows the percentage of «early» consumers in the economy
(say50%).

Example:
t=0 t=1 t=2
| | | time
Consumers They can They can withdraw
deposit1$ in withdrawc1 c2 if theydid not
the bank withdrawn at t=1

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 A model of bank run -8

Two types of equilibria could arise:

• a good equilibrium

Or

• a bad equilibrium (bank run)

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 A model of bank run -9
The good equilibrium

At t=1
• each type discovers its type (private info)
• «early» consumers withdraw their money and consumec1>1
• bank liquidate enough of the long-term bonds to fulfill depositors’ demand of
liquidity (on afirst come first served base)

At t=2
• long-term bonds return R > 1
• «late» consumers withdraw their money and consume c2<R

t=0 t=1 t=2

| | | time
Consumers Only early Only late withdraw
deposit1$ in withdrawc1 c2
the bank

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 A model of bank run -10
The bad equilibrium – BANK RUN
At t=1
• each type discovers its type (private info)
• all consumers walk to the bank to withdraw their money
• long-term bonds must be all prematurely liquidated

Do you think the bank hasenough money to repay all depositors?

Given that c1> 1, No

t=0 t=1 t=2

| | | time
Consumers Everyone runsto
deposit1$ in withdrawc1
the bank

• Why do they all run, then? This happens if late consumers believe that other late consumers
would run at t=1 not enough money would be there for them if they wait tilat t=2.
• In fact, what would you do if you expected everyone else to run at t=1?You would run,
knowing that deposits are liquidated on a first come –first serve basis. Since we’d all think the
same…we’d all run! 41
 Numerical example-1

Assume there are 100 risk-averse depositors with 1$

each (50% are late). Long run bond returns R=2

At t=0 you don’t know if you are late or early.

The best you can do by yourself:

Take your $1 and buy the long term bond.

• If at t=1 you discover you are an early consumer, you
liquidate the bond and consume $1.
• If at t=1 you discover you are a late consumer, you earn R=2
and consume $2.

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 Numerical example-2

Assume the bank offers

• c1*=1.1 to whoever withdraws at t=1
• c2*=1.8 to whoever withdraws at t=2

Hence, between:

c1*=1.1 ; c2*=1.8 (with the bank) and c1=1; c2=2

("autarchy")

Risk-averse consumers prefer the contract with the bank (consume

more than $1 at t=1 at the cost of sacrifying abit of R at t=2)

→ «consumption smoothing» is valued by risk averse depositors

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 Numerical example-3

The good equilibrium

• The bank holds cash (c1*=)$1.1 x50=$55 to fulfill

requests by early consumers at t=1 and keeps $100-
$55=$45 invested in the long-term bond.

• At t=2 the bank has $45x$2= $90 to repay 50 late

consumers, returning $90/50=$1.8 (=c2*) each.

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 Numerical example-4

The bad equilibrium

Assume at t=1 you are a late consumer and expect

all others depositors to walk to the bank to
withdraw their money.

• The bank has promised to return (c1*=)$1.1 to

depositors at t=1.

• However you know that, if all other depositors (99

people, 100 but you) run, there won’t be enough
liquidity at the bank, since $1.1x99=$108.9 >100$!

 you better run faster!

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 Numerical example-5
The bad equilibrium (cntd)

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 Possibleremedies

• Suspension of convertibility: reputation of deposits

asthe most liquid asset (same ascash as mean of payment).

 Stops the run, but loss of trust in banks.

• Deposit insurance: insurance to all depositors (late

depositors) that they will get their money at t=2 even if all
others depositors withdraw their money at t=1.

…but who is paying for it?

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 How to avoid runs and contagion?

Guarantee depositors will always receive their money back,

irrespective of

- what the others do (panics)

- whether their bank will have enough money to repay them (fundamental-
driven runs)

 Deposit insurance

Main idea: if a depositor believes that his claim is secure, he will not
have any incentive to run

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 Deposit insurance

Guarantee that all or part of the amount deposited by

savers in a bank will be paid in the event that a bank
fails

It is usually an explicit guarantee, written in

law/regulation

Characteristics of deposit insurance are country specific

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Level, coverage
Form (private or public)
Funding (ex ante, ex post)

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 Deposit insurance: a bit of history

The United States introduced deposit insurance in the

1930s, when also the Federal Deposit Insurance
Corporation (FDIC) was created

Many countries followed in the period 1970-2011

In Europe first directive in 1994 setting minimum levels

But many, still, did not have an explicit DI before the

50

crisis
Examples: Australia, China, Saudi Arabia, South Africa

113 countries had DI by 2014

50
 Deposit insuranceduring the crisis

Urgent need to restore confidence in the financial

sector

Numerous countries introduced and/or increased DI

during the crisis
- Some countries introduced unlimited coverage on retail deposits
- Wholesale liabilities were also guaranteed: only new senior debt
(Australia, Spain) or interbank market claims (Ireland)

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In US coverage increased from 100,000 to 250,000$

Attempt of harmonization in Europe – directive in 2009

All countries had to guarantee deposits up to 100,000 euro

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52

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 Necessaryfeaturesfor DI

In order to contribute effectively to maintain financial

stability, DI needs to be

1. Credible
2. Properly designed
3. Well implemented and understood by the public

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In any case, DI can deal with a limited number of

simultaneous bank failures, but not with a systemic
crisis.

53
 A bit moredetailson DI

Credible
Private deposit insurance fund: better ex ante or ex post
funding?
Public deposit insurance fund: difference between strong
or weak fiscal capacity

Properly designed
How much is the coverage and which liabilities are
covered?
How much should banks contribute? How to calculate the
premium?

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 Drawbacksof deposit insurance

As any form of insurance, deposit insurance may create

moral hazard

Investors are less concerned about the behavior/ soundness of their banks
 This may give incentives to a bank manager to take more risk

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 More on moralhazard problem

There is a clear trade-off :

Prevention of runs and contagion if credible

vs
Increase in moral hazard by banks (more risk taking)

Implications for the design of the scheme

 Partial coverage (amount and type of investors covered)

56
 A «real»example: Ireland in 2008

Blanket guarantees for all liabilities of the six major banks -

total coverage of €400 billion or 200% of GDP
In addition to other measures: recapitalization and purchase of
toxic assets for at least €50 billion

Irish deficit reached 32% of GDP in 2010

This undermined credibility and effectiveness of the scheme

Bailout plan by EU and IMF for €85 billion plus loans from
UK, Sweden and Denmark became necessary to restore
credibility and confidence in the financial system

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58

58
 Lessons from Ireland

Providing generous guarantees prevents runs and

thus preserve financial stability

However, it has drawbacks

- Put at risk the solvency of the insurer (in this case, the
Irish sovereign) and thus the credibility of the scheme

- Increase public deficit and debt substantially

- May worsen the moral hazard problem (in anticipation of

future similar extensive guarantees)

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 Systemic risk and contagion

Chap.2 – Financial crisis - in De Haan et al. 2014

60
 Bankingcrisis
The anatomy of a banking crisis on the liability side:

• following a liquidity drain (depositors withdraw their

money from the bank for a loss of confidence)

• the bank although solvent is forced to sell its illiquid assets (assets
like loans to small and opaque firms which are typically illiquid
given their long-term maturity)

• when many banks at the same times try to sell their assets, the
price of the asset drops (fire sales)

• many banks from illiquid become insolvent!

In modern time instead of bank run by depositors at the retail

level, we seemore run in the wholesale market (liquidity freeze
in the interbank market).
61
 Banking crisis (cntd.)

A banking crisis might originate from the assetside

• following a macro shock, the quality of the assets in the

b/s of several banks might deteriorate

• depositors lose confidence due to the arrival of bad

news on the asset value of their bank

• bank panic is derived from the deterioration of the asset

value of banks due to the recession

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 Single bank risk of insolvency

real
depositors CB economy

bank run assets lose value insolvency

liquidity
risk risk

63
 From single bank to systemic risk

real
depositors CB economy

bank run assets lose value insolvency

liquidity
risk risk
• idiosyncratic risk (regional shock)?
• aggregate risk (worldwide/national)?

64
From single bank to systemic risk

CB1 CB2

CB3

contagion

CB1 CB2

CB3

macro shock

65
 Systemicrisk
• Now we turn from individual bank risks (interest rate risk,
credit risk, bank runs etc.) to “systemic risk”

• Two types ofsystemic risk

– Contagion: The release of bad news about a bank, or even

its failure, leads in asequential fashion to the failure of
numerous other banks
idiosyncratic shock + propagation

– Macro shock: Simultaneous failures ofmany banks

aggregate shock
66
 Sourcesof systemicrisk

Contagion mechanisms
1. Domino effect
2. Information contagion

Macro shocks
1. Bursting of real estatebubbles
2. Fire sales of assets
3.Sovereign default

67
 Contagionmechanisms

1. Domino effect:

The failure of a financial institution triggers the failure of

others that have exposures to the failing institution (e.g. on
the interbank market)

– If one bank fails, it cannot repay the other(s) fully, and

there may be achain of losses
– If these losses are largeenough, they cause the failureof
other banks

Contagion depends on the number and shape of

connections among banks (too interconnected to fail?)

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 Contagion mechanisms(cont.)

2. Information contagion

Negative information about one bank negatively affects other banks

– With common fundamentals/ characteristics

(fundamental contagion)

– Or even if they have nothingin common with the ailing bank

(panic contagion)

69
 Macro shocks

1. Bursting of real estate bubbles

• What is a housing/asset bubble?

A run-up in housing/asset prices fueled by demand and speculation

– It starts with astrong increase in demand (and “sticky”

supply)
– Speculators enter the market, believing that profits can be
made through short-term buying/selling
– At some point, demand decreases (with the supply perhaps
increasing), resulting in a sharp drop in prices - the bubble
bursts!

• At the beginning of 2007 there wasahousing bubble in the US, but

also in some European countries (e.g., Ireland and Spain) and it
burst

70
 Housing Pricesin Ireland, SpainandtheU.S.

Source=Beck et al. 2011

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 What caused thebubble?

1. Loose monetary policies, especially by the U.S.Federal

Reserve

2. Excessive availability of credit due to global imbalances

(e.g. large accumulation of reserves by Asian countries after
the crisis in 1997)

3. Mortgage securitization contributed to relaxing lending

standards, thus stimulating demand but reducing quality of
mortgage underwriting

72
 Macro shocks
2. Fire sales of assets

• Normally, a price of an assetreflects its fundamental

value (i.e.,its future earning power)

• Sometimes, however, this does not happen

– When liquidity is scarce, prices reflect the cash

available to buyers in the market (fire sale or cash-in-
the-market”)

– This happens when there are many assets on sale in the

market but market liquidity does not expand accordingly

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 Macro shocks

3. Sovereign default or stress

• Banks hold large proportions of sovereign debt in their

portfolios

• If a sovereign defaults, this may lead to large losses for banks

– Example:
• Greek default
• European sovereign debt crisis in 2011-2013

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75
Recent developments – until 2016

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Recent developments – post Covid

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 To sumup

• Banks are subject to many risks and do fail

• Contagion and systemic risk are the main

concern of regulators and the main reason behind
bank regulation

• Contagion originates (mostly) from domino

effect and information spillovers

• Macro shocks are due to house pricing bubbles,

fire sales and risk of sovereign default

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 A model of a bankingcrisis-1
Allen Gale (1998) show how a banking crisis might arise

 when depositors react to the state of the

macroeconomy

Because, following a macro shock, the quality of the assets in

the b/s of several banks might deteriorate.

In the Diamond Dybvig model (with early and late

consumers)

• assume that R (the return on the long term asset) is

stochastic and tied to the business cycle
• depositors observe asignal of this return R (a leading
indicator of the businesscycle)
 The bank run occurs when late consumers decide to run to
the bank and withdraw earlier because they fear that nothing is
left for them by other depositors.
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 A model of a bankingcrisis-2
The banks proposes a contract with

• c1=L independent upon R at t= 1 (standard deposits do not depend on the

macroeconomic state)

Define:

• a(R)= proportion of late consumers willing to withdraw earlier at t=1.

The lower R, the greater is this share.

• 1-a(R) = proportion of late consumers who wait till t=2 to withdraw

Imagine R=0: then all late consumers run to the bank and have to share the
liquidity L with early consumers (L/2)

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 A model of a bankingcrisis-3
• c2(R)=(1-a(R))c2 is an increasing function of R (value of
assets)att=2

A bank run occurs wheneverc1> c2(R) (late consumers prefer

anticipating their withdrawal), that is for low values of R

bank
run

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 Bankingcrisis-1

• Banking crisis follow a period of credit boom or a

bubble in asset prices.
• Financial cycles amplify business cycles.

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 Bankingcrisis-2

• The cost of a banking crisis is also very high

• The fiscal cost is not only due to bail out of

insolvent banks, but mainly to the fiscal cost of an
economic recession

• Following abanking crisis: drop of GDP by 9% in

the following 2 years and rise in unemployment by
7% in the following 4 years –estimates by Reinhart –
Rogoff (2009)
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 Bank runs - numerical examples
Instructions:
You can change the numbers in the green cells
The result will appear in the yellow highlighted cells

Compute max c1 given c2 Compute max c2 given c1 Example

Total N of depositors 100 100 100
N early 40 25 25
N late 60 75 75

C1 1,2 1,4 1,4

C2 1,65 1,73 1,73
R 1,9 2 2

GOOD EQUILIBRIUM - calculation steps:

Each late depositor can withdraw 1,65

Money withdrawn at t=2 99
Money left after early people withdraw 52,10526316
Money withdrawn at t=1 47,89473684
Number of depositors withdrawing at t=1 40
c1 1,2

Number of depositors withdrawing at t=1 25 25

Money withdrawn at t=1 35 35
Money that stays invested in the long term bond 65 65
Gross total returns from bond at t=2 130 130
c2 1,73 1,73

You can try changing the numbers in the above squared cells.

Then, compare the highlighted numbers: is the good equilibrium achievable? Do

you think the bank will propose such a deposit contract?

84
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