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The Invisible Hand And The Banking Trade: Seigniorage, Risk-Shifting, And More

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  • MARCUS MILLER
  • LEI ZHANG

Abstract

ABSTRACT:The classic Diamond-Dybvig model of banking assumes perfect competition and abstracts from issues ofmoral hazard. To reflect conditions prevailing in UK banking, however, we incorporate market powerand risk-taking by banks with limited liability, with explicit analytical results for the case wheredepositors are highly risk averse. We show how the effectiveness of bank franchise value in checkingrisk-taking may be undermined by the prospect of bailouts; and how bail-in provisions are beingdesigned to correct this.

Suggested Citation

  • Marcus Miller & Lei Zhang, 2013. "The Invisible Hand And The Banking Trade: Seigniorage, Risk-Shifting, And More," Brussels Economic Review, ULB -- Universite Libre de Bruxelles, vol. 56(3-4), pages 365-388.
    • Handle: RePEc:bxr:bxrceb:2013/174863
    Note: Special Issue30th Symposium on Money, Banking and FinanceGuest editors: Christian Aubin, Noëlle Duport andDaniel Goyeau
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    More about this item

    Keywords

    Money and banking; Seigniorage; Risk-taking; Bailouts; Regulation;
    All these keywords.

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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