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Financial System Architecture: The Role of Systemic Risk, Added Value and Liquidity

  • Jose M P Jorge

    (Universidade do Porto)

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    Risky investment projects make the coordination among small, uninformed investors hard to achieve, and generate inefficient low levels of investment. Several authors have pointed out the benefits to an economy from multiple avenues of financial intermediation. This paper explains endogenously different financial architectures and classifies them according to the capacity of financial intermediaries to reallocate risks and create added value. In some of these architectures, financial intermediaries improve coordination among agents by providing insurance over the primitive payoffs available in decentralized financial markets. This enhances efficiency and stabilizes the economy against fundamental shocks and confidence shifts. In other financial architectures financial intermediation plays a minor role or is unfeasible

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    File URL: http://repec.org/mmf2006/up.16002.1150123028.pdf
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    Paper provided by Money Macro and Finance Research Group in its series Money Macro and Finance (MMF) Research Group Conference 2006 with number 155.

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    Date of creation: 02 Feb 2007
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    Handle: RePEc:mmf:mmfc06:155
    Contact details of provider: Web page: http://www.essex.ac.uk/afm/mmf/index.html

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    1. Diamond, Douglas W, 1997. "Liquidity, Banks, and Markets," Journal of Political Economy, University of Chicago Press, vol. 105(5), pages 928-56, October.
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    8. Evan Gatev & Philip E. Strahan, 2003. "Banks' Advantage in Hedging Liquidity Risk: Theory and Evidence from the Commercial Paper Market," NBER Working Papers 9956, National Bureau of Economic Research, Inc.
    9. Anil K. Kashyap & Raghuram Rajan & Jeremy C. Stein, 2002. "Banks as Liquidity Providers: An Explanation for the Coexistence of Lending and Deposit-Taking," Journal of Finance, American Finance Association, vol. 57(1), pages 33-73, 02.
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    14. Shin, Hyun Song & Morris, Stephen, 2000. "Welfare effects of public information," Discussion Paper Series 1: Economic Studies 2000,07, Deutsche Bundesbank, Research Centre.
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