On the Stability of Different Financial Systems
AbstractAn economy in which deposit-taking banks of a Diamond and Dybvig style and a financial market coexist is modeled in a simple framework closely related to Diamond (1997). Solely depending on the fraction of naÃ¯ve households who cannot efficiently invest directly in the cor-porate sector, two different types of financial systems emerge. With the fraction comparatively low, the evolving financial system can be interpreted as market-oriented, whereas a high frac-tion brings about a bank-dominated financial system. In market-oriented systems, banks only provide naÃ¯ve households with access to efficient investments; in bank-dominated systems, banks' deposit contracts also offer some degree of liquidity insurance. Consequently, com-pared to market-oriented financial systems, the household sector in bank-dominated financial systems holds a larger portfolio fraction in deposits and a smaller part in direct investments. Analyzing the resilience of the different financial systems to various types of shocks shows that moderately bank-dominated (or hybrid) financial systems are particularly fragile, because only in these systems do fire sales of assets by distressed banks cause a deterioration in asset prices that also precipitates other banks into crisis. (JEL: D52, E44, G10, G21) Copyright (c) 2004 by the European Economic Association.
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Bibliographic InfoPaper provided by Department of Finance, Goethe University Frankfurt am Main in its series Working Paper Series: Finance and Accounting with number 110.
Date of creation: 2003
Date of revision:
Other versions of this item:
- E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
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