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Confidence Banking

  • Guillermo L. Ordonez

    (Yale University)

A shadow unregulated banking system flourished during the first decade of the century and suddenly collapsed in less than a year. It is widely accepted this shadow system was based on confidence, but it is not clear how confidence can spur so much and then disappear so fast. In this paper I argue confidence is sustained by the recognition that financial agents care about reputation. While reputation incentives generate an alternative cheaper than traditional banking to provide financing needs, it is also a fragile alternative, that may suddenly collapse. This implies financial regulation should be counter-cyclical, but not imposing more costs to traditional banking during good times but inducing more benefits to better firms during bad times.

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File URL: https://economicdynamics.org/meetpapers/2010/paper_310.pdf
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Paper provided by Society for Economic Dynamics in its series 2010 Meeting Papers with number 310.

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Date of creation: 2010
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Handle: RePEc:red:sed010:310
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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