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Are banks excessively monitored?

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Abstract

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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  • Urs W. Birchler, 2000. "Are banks excessively monitored?," Working Papers 00.14, Swiss National Bank, Study Center Gerzensee.
  • Handle: RePEc:szg:worpap:0014
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    References listed on IDEAS

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    1. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
    2. Cheol Park, 2000. "Monitoring and Structure of Debt Contracts," Journal of Finance, American Finance Association, vol. 55(5), pages 2157-2195, October.
    3. Beth Allen, 2000. "The Future of Microeconomic Theory," Journal of Economic Perspectives, American Economic Association, vol. 14(1), pages 143-150, Winter.
    4. Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Oxford University Press, vol. 51(3), pages 393-414.
    5. Birchler, Urs W, 2000. "Bankruptcy Priority for Bank Deposits: A Contract Theoretic Explanation," Review of Financial Studies, Society for Financial Studies, vol. 13(3), pages 813-840.
    6. Cukierman, Alex, 1980. "The Effects of Uncertainty on Investment under Risk Neutrality with Endogenous Information," Journal of Political Economy, University of Chicago Press, vol. 88(3), pages 462-475, June.
    7. G. G. Garcia, 1999. "Deposit Insurance; A Survey of Actual and Best Practices," IMF Working Papers 99/54, International Monetary Fund.
    8. Xu, Bin, 2000. "The Welfare Implications of Costly Monitoring in the Credit Market: A Note," Economic Journal, Royal Economic Society, vol. 110(463), pages 576-580, April.
    9. Krasa, Stefan & Villamil, Anne P., 1992. "Monitoring the monitor: An incentive structure for a financial intermediary," Journal of Economic Theory, Elsevier, vol. 57(1), pages 197-221.
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