Are banks excessively monitored?

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Are banks excessively monitored?

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Urs W. Birchler () (Swiss National Bank, Zürich)

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Urs W. Birchler

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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Paper provided by Swiss National Bank, Study Center Gerzensee in its series Working Papers with number 00.14.

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Length: 28 pages
Date of creation: Nov 2000
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Handle: RePEc:szg:worpap:0014

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This paper has been announced in the following NEP Reports:

NEP-ALL-2001-01-21 (All new papers)

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

Hellwig, Martin, 1998. "Allowing for Risk Choices in Diamond's "Financial Intermediation as Delegated Monitoring"," Sonderforschungsbereich 504 Publications 98-04, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim.
Cukierman, Alex, 1980. "The Effects of Uncertainty on Investment under Risk Neutrality with Endogenous Information," Journal of Political Economy, University of Chicago Press, vol. 88(3), pages 462-75, June. [Downloadable!] (restricted)
Cheol Park, 2000. "Monitoring and Structure of Debt Contracts," Journal of Finance, American Finance Association, vol. 55(5), pages 2157-2195, October. [Downloadable!] (restricted)
Beth Allen, 2000. "The Future of Microeconomic Theory," Journal of Economic Perspectives, American Economic Association, vol. 14(1), pages 143-150, Winter. [Downloadable!] (restricted)
Urs W. Birchler, 1999. "Bankruptcy Priority for Bank Deposits: a Contract Theoretic Explanation," Working Papers 00.01, Swiss National Bank, Study Center Gerzensee. [Downloadable!]
Other versions:
- Birchler, Urs W, 2000. "Bankruptcy Priority for Bank Deposits: A Contract Theoretic Explanation," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 13(3), pages 813-40.
Xu, Bin, 2000. "The Welfare Implications of Costly Monitoring in the Credit Market: A Note," Economic Journal, Royal Economic Society, vol. 110(463), pages 576-80, April. [Downloadable!] (restricted)
Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Blackwell Publishing, vol. 51(3), pages 393-414, July. [Downloadable!] (restricted)
Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23. [Downloadable!]
Other versions:
- Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June. [Downloadable!] (restricted)

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