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Are banks excessively monitored?

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Abstract

Insuffucient monitoring by depositors, and thus a lack of market discipline, are often seen as a typical feature of banks. We show that the opposite may be the case. Banks, defined as firms that borrow from a large number of partially uninformed investors, have a tendency to be excessively monitored by informed investors. This is shown in a model of intermediation in which heterogenous investors choose whether they want to monitor the intermediary or not. We also find that banks finance is preferable to non-bank finance when assets are relatively safe or opaque. The model which is set in a banking context may be applicable to a wider range of information problems.

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  • Urs W. Birchler, 2000. "Are banks excessively monitored?," Working Papers 00.14, Swiss National Bank, Study Center Gerzensee.
    • Handle: RePEc:szg:worpap:0014
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    References listed on IDEAS

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