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

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  • Jose M P Jorge

    (Universidade do Porto)

Abstract

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

Suggested Citation

  • Jose M P Jorge, 2007. "Financial System Architecture: The Role of Systemic Risk, Added Value and Liquidity," Money Macro and Finance (MMF) Research Group Conference 2006 155, Money Macro and Finance Research Group.
  • Handle: RePEc:mmf:mmfc06:155
    as

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    File URL: http://repec.org/mmf2006/up.16002.1150123028.pdf
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    References listed on IDEAS

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    1. Jean-Charles Rochet & Xavier Vives, 2004. "Coordination Failures and the Lender of Last Resort: Was Bagehot Right After All?," Journal of the European Economic Association, MIT Press, vol. 2(6), pages 1116-1147, December.
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    6. Allen, Franklin & Gale, Douglas, 1997. "Financial Markets, Intermediaries, and Intertemporal Smoothing," Journal of Political Economy, University of Chicago Press, vol. 105(3), pages 523-546, June.
    7. E. P. Davis, 2001. "Multiple Avenues of Intermediation, Corporate Finance and Financial Stability," IMF Working Papers 01/115, International Monetary Fund.
    8. Bengt Holmstrom & Jean Tirole, 1998. "Private and Public Supply of Liquidity," Journal of Political Economy, University of Chicago Press, vol. 106(1), pages 1-40, February.
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    More about this item

    Keywords

    Banking; Financial System; Systemic Risk; Global Games;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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