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Commitment, banks and markets

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  • Antinolfi, Gaetano
  • Prasad, Suraj

Abstract

We examine how banks and financial markets interact with one another to provide liquidity to investors. The critical assumption is that financial markets are characterized by limited enforcement of contracts, and in the event of default only a fraction of borrowers' assets can be seized. Limited enforcement reduces the fraction of assets that can be used as collateral and thus individuals subject to liquidity shocks face borrowing constraints. We show how banks endogenously overcome these borrowing constraints by pooling resources across several depositors, and increase the liquidity provided by financial markets.

Suggested Citation

  • Antinolfi, Gaetano & Prasad, Suraj, 2008. "Commitment, banks and markets," Journal of Monetary Economics, Elsevier, vol. 55(2), pages 265-277, March.
    • Handle: RePEc:eee:moneco:v:55:y:2008:i:2:p:265-277
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    References listed on IDEAS

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    Cited by:

    1. Christine Brown & Viet Do & Oscar Trevarthen, 2017. "Liquidity shock management: Lessons from Australian banks," Australian Journal of Management, Australian School of Business, vol. 42(4), pages 637-652, November.
    2. Ettore Panetti, 2017. "A Theory of Bank Illiquidity and Default with Hidden Trades," Review of Finance, European Finance Association, vol. 21(3), pages 1123-1157.
    3. Donaldson, Jason & Piacentino, Giorgia, 2019. "Money Runs," CEPR Discussion Papers 13955, C.E.P.R. Discussion Papers.
    4. Zhang, Yu, 2017. "Asset price risk, banks and markets," Finance Research Letters, Elsevier, vol. 21(C), pages 21-25.
    5. Jason R. Donaldson & Giorgia Piacentino, 2019. "Money Runs," NBER Working Papers 26298, National Bureau of Economic Research, Inc.
    6. Zhang, Yu, 2017. "Asset price volatility and banks," Journal of Mathematical Economics, Elsevier, vol. 71(C), pages 96-103.
    7. Park, Jaevin, 2023. "Rights to retrade, free-riding and insurance requirement," Economics Letters, Elsevier, vol. 225(C).
    8. Donaldson, Jason Roderick & Piacentino, Giorgia, 2022. "Money runs," Journal of Monetary Economics, Elsevier, vol. 126(C), pages 35-57.

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