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We augment a simple Real Business Cycle model with financial interme-
diaries that may default on their liabilities and a financial friction generating social
costs of default. We provide a closed-form solution for the general equilibrium of the
economy under specific assumptions, allowing for analytical results and straightforward
intuitions. Endogenous default generates a negative skew for GDP and a positive skew
for credit spreads, as found in US data. Stronger financial frictions cause a rise in
asymmetry, which amplifies the welfare costs of fluctuations. A Pigouvian tax on finan-
cial intermediation alleviates the costs of fluctuations at the expense of a steady-state
distortion. In most cases, the welfare-maximizing policy also attenuates asymmetry.
