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Maturity Transformation without Maturity Mismatch and Bank Panics

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  • Juha-Pekka Niinimäki

Abstract

We demonstrate that a bank can offer demand deposits and yet avoid bank runs without deposit insurance if it also offers time deposits that have a low liquidation value. Self-fulfilling runs do not occur, as maturity mismatch is eliminated. To do this, we modify Diamond and Dybvig"s [1983] model so that depositors have differing risks of encountering a preference shock. We show that high-risk depositors will hold their savings as demand deposits, whereas low-risk depositors will prefer time deposits. These deposit choices transfer liquidity optimally from low-risk to high-risk depositors, who place the highest value on liquidity.

Suggested Citation

  • Juha-Pekka Niinimäki, 2003. "Maturity Transformation without Maturity Mismatch and Bank Panics," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 159(3), pages 511-522, September.
    • Handle: RePEc:mhr:jinste:urn:sici:0932-4569(200309)159:3_511:mtwmma_2.0.tx_2-t
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    References listed on IDEAS

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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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