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Financial intermediation, monitoring, and liquidity

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  • François Marini

Abstract

This paper constructs a theoretical model that integrates the two objectives of capital adequacy requirements and deposit insurance, namely avoiding banking crises and protecting small depositors. The paper also addresses the related question: why do banks fund loans with both equity and demand deposits? The model determines the optimal bank capital structure. In comparison with a Diamond-Dybvig bank which funds loans with demand deposits only, a capitalized financial intermediary provides liquidity to its depositors at a lower cost, and channels more funds to the most efficient investments. The model identifies the sources of market failure that may justify banking regulation. Copyright 2008 , Oxford University Press.

Suggested Citation

  • François Marini, 2008. "Financial intermediation, monitoring, and liquidity," Oxford Economic Papers, Oxford University Press, vol. 60(3), pages 440-461, July.
    • Handle: RePEc:oup:oxecpp:v:60:y:2008:i:3:p:440-461
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    File URL: http://hdl.handle.net/10.1093/oep/gpm041
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