Are banks excessively monitored?
Insuffucient monitoring by depositors, and thus a lack of market discipline, are often seen as a typical feature of banks. We show that the opposite may be the case. Banks, defined as firms that borrow from a large number of partially uninformed investors, have a tendency to be excessively monitored by informed investors. This is shown in a model of intermediation in which heterogenous investors choose whether they want to monitor the intermediary or not. We also find that banks finance is preferable to non-bank finance when assets are relatively safe or opaque. The model which is set in a banking context may be applicable to a wider range of information problems.
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- Birchler, Urs W, 2000.
"Bankruptcy Priority for Bank Deposits: A Contract Theoretic Explanation,"
Review of Financial Studies,
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- Urs W. Birchler, 1999. "Bankruptcy Priority for Bank Deposits: a Contract Theoretic Explanation," Working Papers 00.01, Swiss National Bank, Study Center Gerzensee.
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"Bank Runs, Deposit Insurance, and Liquidity,"
Journal of Political Economy,
University of Chicago Press, vol. 91(3), pages 401-19, June.
- Beth Allen, 2000. "The Future of Microeconomic Theory," Journal of Economic Perspectives, American Economic Association, vol. 14(1), pages 143-150, Winter.
- Cheol Park, 2000. "Monitoring and Structure of Debt Contracts," Journal of Finance, American Finance Association, vol. 55(5), pages 2157-2195, October.
- G. G. Garcia, 1999. "Deposit Insurance; A Survey of Actual and Best Practices," IMF Working Papers 99/54, International Monetary Fund.
- Xu, Bin, 2000. "The Welfare Implications of Costly Monitoring in the Credit Market: A Note," Economic Journal, Royal Economic Society, vol. 110(463), pages 576-80, April.
- Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
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