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Loanable Funds, Monitoring and Banking

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  • Huberto M. Ennis

Abstract

This paper studies financial intermediation in a general equilibrium overlapping generations model. Indivisible investment projects combine with informational imperfections to create a (hidden action) moral hazard problem and introduce a role for third-party monitoring. Agency costs at the intermediary level are also considered. Under some conditions, monitors can be viewed as banks facing a non-trivial portfolio diversification problem. Equilibria are derived in which a large national bank coexists with a number of regional banks, a structure of strong empirical relevance. Policies such as a mandatory reserve requirement are shown to have substantial effects on the levels of investment in the economy.

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File URL: http://fic.wharton.upenn.edu/fic/papers/00/0021.pdf
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Bibliographic Info

Paper provided by Wharton School Center for Financial Institutions, University of Pennsylvania in its series Center for Financial Institutions Working Papers with number 00-21.

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Date of creation: Feb 2000
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Handle: RePEc:wop:pennin:00-21

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Cited by:
  1. Huberto M. Ennis, 2001. "On the size distribution of banks," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 1-25.
  2. Huberto M. Ennis, 2000. "Banking and the political support for dollarization," Working Paper 00-12, Federal Reserve Bank of Richmond.
  3. Miyake, Atsushi & Nakamura, Tamotsu, 2007. "A dynamic analysis of an economy with banking optimization and capital adequacy regulations," Journal of Economics and Business, Elsevier, vol. 59(1), pages 14-27.

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