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The Term-Structure of Investment and the Banks' Insurance Function

Listed author(s):
  • Ernst-Ludwig VON THADDEN

The article re-examines the proposition, first formulated by Bryant (1980) and Diamond and Dybcvig ( 1983), that in a production economy with stochastic liquidity shocks to the household sector, banks serve to provide optimal intertemporal insurance to consumers. The paper argues that in order to understand the moral hazard problems inherent in this insurance problem, it is too narrow to consider solely the role of banks as providers of liquidity. The paper develops a model with several investment opportunities in which banks have the additional function of asset diversification.

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Paper provided by Université de Lausanne, Faculté des HEC, DEEP in its series Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) with number 9606.

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Length: 22 pages
Date of creation: Feb 1996
Publication status: Published in European Economic Review, vol. 41 (7), July 1997, pp. 1355-1374
Handle: RePEc:lau:crdeep:9606
Contact details of provider: Postal:
Université de Lausanne, Faculté des HEC, DEEP, Internef, CH-1015 Lausanne

Phone: ++41 21 692.33.20
Web page: http://www.hec.unil.ch/deep/publications/cahiers/series
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  1. Valerie R. Bencivenga & Bruce D. Smith, 1991. "Financial Intermediation and Endogenous Growth," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 195-209.
  2. Haubrich, Joseph G. & King, Robert G., 1990. "Banking and insurance," Journal of Monetary Economics, Elsevier, vol. 26(3), pages 361-386, December.
  3. Bhattacharya Sudipto & Thakor Anjan V., 1993. "Contemporary Banking Theory," Journal of Financial Intermediation, Elsevier, vol. 3(1), pages 2-50, October.
  4. Hellwig, Martin, 1994. "Liquidity provision, banking, and the allocation of interest rate risk," European Economic Review, Elsevier, vol. 38(7), pages 1363-1389, August.
  5. Malinvaud, E., 1972. "The allocation of individual risks in large markets," Journal of Economic Theory, Elsevier, vol. 4(2), pages 312-328, April.
  6. 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.
  7. Jacklin, Charles J., 1993. "Market rate versus fixed rate demand deposits," Journal of Monetary Economics, Elsevier, vol. 32(2), pages 237-258, November.
  8. Ernst-Ludwig von Thadden, 1995. "Long-Term Contracts, Short-Term Investment and Monitoring," Review of Economic Studies, Oxford University Press, vol. 62(4), pages 557-575.
  9. Engineer, Merwan, 1989. "Bank runs and the suspension of deposit convertibility," Journal of Monetary Economics, Elsevier, vol. 24(3), pages 443-454, November.
  10. Mathias Dewatripont & Jean Tirole, 1994. "The prudential regulation of banks," ULB Institutional Repository 2013/9539, ULB -- Universite Libre de Bruxelles.
  11. Qi, Jianping, 1994. "Bank Liquidity and Stability in an Overlapping Generations Model," Review of Financial Studies, Society for Financial Studies, vol. 7(2), pages 389-417.
  12. Chari, V V & Jagannathan, Ravi, 1988. " Banking Panics, Information, and Rational Expectations Equilibrium," Journal of Finance, American Finance Association, vol. 43(3), pages 749-761, July.
  13. Bryant, John, 1980. "A model of reserves, bank runs, and deposit insurance," Journal of Banking & Finance, Elsevier, vol. 4(4), pages 335-344, December.
  14. Neil Wallace, 1988. "Another attempt to explain an illiquid banking system: the Diamond and Dybvig model with sequential service taken seriously," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 3-16.
  15. Neil Wallace, 1990. "A banking model in which partial suspension is best," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 11-23.
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