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Financial Deepening and Bank Runs

  • Hoerova, Marie

    (Cornell U)

We analyze an economy with banks and markets and uncover implications of the presence of asset markets for the run-prone banking sector. Consumers can split their endowment between a market investment and a deposit contract which admits bank runs. Banks specialize in providing ex ante liquidity insurance. Market investment acts as insurance if there is a run. Banks provide a higher degree of the liquidity insurance while facing a lower probability of a run when compared to the banks-only economy. As long as consumers invest in both the market and the deposit contract, the welfare is higher when compared to the economy with banks, or markets, alone.

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Paper provided by Cornell University, Center for Analytic Economics in its series Working Papers with number 05-07.

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Date of creation: May 2005
Date of revision:
Handle: RePEc:ecl:corcae:05-07
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