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Liquidity Creation without Banks

Author

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  • Simas Kucinskas

    (VU University Amsterdam, the Netherlands)

Abstract

I revisit the Diamond-Dybvig model of liquidity insurance in the presence of hidden trades. The key result is that in this environment deposit-taking banks are not necessary for the efficient provision of liquidity. Mutual funds are constrained efficient when supplemented with the same government liquidity regulation that is required to make a banking system constrained efficient. However, whereas banks are potentially subject to costly panics, mutual funds are not run-prone and hence superior from a welfare perspective if runs happen with a non-zero probability.

Suggested Citation

  • Simas Kucinskas, 2015. "Liquidity Creation without Banks," Tinbergen Institute Discussion Papers 15-101/VI, Tinbergen Institute.
  • Handle: RePEc:tin:wpaper:20150101
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    File URL: http://papers.tinbergen.nl/15101.pdf
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    References listed on IDEAS

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    Cited by:

    1. Grochulski, Borys & Zhang, Yuzhe, 2015. "Optimal Liquidity Regulation With Shadow Banking," Working Paper 15-12, Federal Reserve Bank of Richmond, revised 15 Oct 2015.
    2. Simas Kucinskas, 2015. "Aggregate Risk and Efficiency of Mutual Funds," Tinbergen Institute Discussion Papers 15-113/VI, Tinbergen Institute.
    3. Kučinskas, Simas, 2016. "When are banks better than markets? Comment on Zimper (2013)," Economics Letters, Elsevier, vol. 147(C), pages 171-173.

    More about this item

    Keywords

    Liquidity creation; liquidity insurance; hidden trades; bank runs; mutual funds; narrow banking; financial stability;

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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