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Banks in the Market for Liquidity

  • Peter Garber
  • Steven Weisbrod

Banks are unique among financial institutions because they are the cheapest source of liquidity in the economy. Banks choose to hold reserves to facilitate settlement of end-of-day net due to positions arising from payments operations. Money market substitutes for bank liabilities do not escape from the cost of reserves since their issuers lean on banks to provide liquidity. Since the cost of reserves falls on all issuers of less liquid liabilities seeking access to payment services, including non-bank intermediaries, reserves cannot represent a tax on the banking system alone.

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File URL: http://www.nber.org/papers/w3381.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3381.

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Date of creation: Jun 1990
Date of revision:
Handle: RePEc:nbr:nberwo:3381
Note: ME
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  1. Marvin Goodfriend, 1989. "Money, credit, banking and payments system policy," Working Paper 89-03, Federal Reserve Bank of Richmond.
  2. James, Christopher, 1987. "Some evidence on the uniqueness of bank loans," Journal of Financial Economics, Elsevier, vol. 19(2), pages 217-235, December.
  3. Lummer, Scott L. & McConnell, John J., 1989. "Further evidence on the bank lending process and the capital-market response to bank loan agreements," Journal of Financial Economics, Elsevier, vol. 25(1), pages 99-122, November.
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