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Financial Deepening and Bank Runs

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  • Hoerova, Marie

    (Cornell U)

Abstract

We analyze an economy with banks and markets and uncover implications 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 providing 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.

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Bibliographic Info

Paper provided by Cornell University, Center for Analytic Economics in its series Working Papers with number 05-07.

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Date of creation: May 2005
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Handle: RePEc:ecl:corcae:05-07

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  1. von Thadden, Ernst-Ludwig, 1999. "Liquidity creation through banks and markets: Multiple insurance and limited market access," European Economic Review, Elsevier, vol. 43(4-6), pages 991-1006, April.
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  18. Neil Wallace, 1990. "A banking model in which partial suspension is best," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 11-23.
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