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Banks versus Markets in Processing the Payments Shock

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  • Dmitri Vinogradov

    (Alfred Weber Institute, Heidelberg University, Germany)

Abstract

The paper focuses on a comparison of bank-based andmarket-based …nancial systems with respect to their ability to smooth the negative consequences of a macroeconomic shock. The model describes a two-market OLG economy with two types of agents (workers and entrepreneurs) and a financial system represented through either banks or a direct market. The dynamic setting allows for a comparison regarding the speed of economic recovery after the shock. The principal finding is that the market-based system provides better arrangements to speed up the recovery, but concentrates the burden of the shock in one period. In contrast, the bank-based system allows for both quick recovery and postponing and smoothing the negative consequences of the shock over several periods, if proper regulation and interventions are used, otherwise the banking system can collapse. As an example of regulatory interventions, liquidity provisions and a deposit rate ceiling are considered. This allows to give some light on the di¤erence between the roles the Deposit Insurer and the Regulator (LOLR) can play in the evolution of events. In particular, deposit insurance alone can not provide an intertemporal shock smoothing and requires additional regulatory interventions. The Paper is presented at the 22nd Symposium on Banking and Monetary Economics held in June 2005 in Strasbourg

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File URL: http://128.118.178.162/eps/fin/papers/0506/0506004.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Finance with number 0506004.

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Length: 27 pages
Date of creation: 07 Jun 2005
Date of revision:
Handle: RePEc:wpa:wuwpfi:0506004

Note: Type of Document - pdf; pages: 27
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Web page: http://128.118.178.162

Related research

Keywords: Financial intermediation; Bank-based system; Market-based system; Regulation; Lelnder of Last Resort; Deposit Insurance;

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References

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  1. Franklin Allen & Douglas Gale, 1996. "Financial Markets, Intermediaries and Intertemporal Smoothing," Center for Financial Institutions Working Papers 96-33, Wharton School Center for Financial Institutions, University of Pennsylvania.
  2. Rochet, Jean-Charles, 2004. "Macroeconomic Shocks and Banking Supervision," IDEI Working Papers 276, Institut d'Économie Industrielle (IDEI), Toulouse.
  3. Frederic S. Mishkin, 2001. "Financial Policies and the Prevention of Financial Crises in Emerging Market Countries," NBER Working Papers 8087, National Bureau of Economic Research, Inc.
  4. Bencivenga, Valerie R & Smith, Bruce D, 1991. "Financial Intermediation and Endogenous Growth," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 195-209, April.
  5. Bolton, Patrick, 2002. "Banking in Emerging Markets," Journal of Financial Intermediation, Elsevier, vol. 11(4), pages 362-365, October.
  6. Dmitri Vinogradov, 2003. "Macroeconomic evolution after a shock: the role for financial intermediation," Macroeconomics 0310007, EconWPA.
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