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Financial Deepening and Bank Runs (2005)
BibTeX
@MISC{Hoerova05financialdeepening,
author = {Marie Hoerova and Marie Hoerova and Todd Keister and B. Ravikumar and Assaf Razin and Yi Wen},
title = {Financial Deepening and Bank Runs},
year = {2005}
}
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Abstract
We analyze an economy with banks and markets and uncover impli-cations of the presence of asset markets for the run-prone banking sector. Consumers can split their endowment between a market investment and a deposit contract which admits bank runs. Banks specialize in provid-ing ex ante liquidity insurance. Market investment acts as insurance if there is a run. Banks provide a higher degree of the liquidity insurance while facing a lower probability of a run when compared to the banks-only economy. As long as consumers invest in both the market and the deposit contract, the welfare is higher when compared to the economy with banks, or markets, alone.
