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Liquidity Creation without Banks

Listed author(s):
  • Simas Kucinskas

    (VU University Amsterdam, the Netherlands)

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    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.

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    Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 15-101/VI.

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    Date of creation: 20 Aug 2015
    Handle: RePEc:tin:wpaper:20150101
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