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Discount Window Lending and Deposit Insurance

  • Williamson, S.D.

    ()

    (University of Iowa)

A banking model is constructed where roles for government- provided deposit insurance and discount window lending arise when there are restrictions on branch banking. Banks arise endogenously as an efficient arrangement for sharing risk. Discount window lending permits better risk sharing by making bank assets more liquid, but is limited because of a moral hazard problem which arises from adverse selection in the loan market. Deposit insurance also creates the potential for better risk sharing, but accomplishes this through contingent transfers rather than enhancing liquidity. Banks tend to take on more risk with deposit insurance and to take less care in screening loans, but this is consistent with an increase in welfare for depositors and borrowers.

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Paper provided by University of Iowa, Department of Economics in its series Working Papers with number 95-01.

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Length: 35 pages
Date of creation: 1995
Date of revision:
Handle: RePEc:uia:iowaec:95-01
Contact details of provider: Postal: University of Iowa, Department of Economics, Henry B. Tippie College of Business, Iowa City, Iowa 52242
Phone: (319) 335-0829
Fax: (319) 335-1956
Web page: http://tippie.uiowa.edu/economics/
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  1. John H. Boyd & Mark Gertler, 1993. "U.S. Commercial Banking: Trends, Cycles, and Policy," NBER Working Papers 4404, National Bureau of Economic Research, Inc.
  2. Stephen D. Williamson, 1989. "Restrictions on Financial Intermediaries and Implications for Aggregate Fluctuations: Canada and the United States 1870-1913," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 303-350 National Bureau of Economic Research, Inc.
  3. Hornstein, Andreas & Krusell, Per, 1993. "Money and Insurance in a Turnpike Environment," Economic Theory, Springer, vol. 3(1), pages 19-34, January.
  4. Cheng Wang & Stephen D. Williamson, 1998. "Debt Contracts with Financial Intermediation with Costly Screening," Canadian Journal of Economics, Canadian Economics Association, vol. 31(3), pages 573-595, August.
  5. Rothschild, Michael & Stiglitz, Joseph E, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 630-49, November.
  6. Cheng Wang & Stephen D. Williamson, 1993. "Adverse Selection in Credit Markets with Costly Screening," Finance 9310001, EconWPA, revised 02 Nov 1993.
  7. Champ, B. & Snith, B.D. & Williamson, D.S., 1991. "Currency Elasticity and Banking Panics: Theory and Evidence," RCER Working Papers 292, University of Rochester - Center for Economic Research (RCER).
  8. Kareken, John H & Wallace, Neil, 1978. "Deposit Insurance and Bank Regulation: A Partial-Equilibrium Exposition," The Journal of Business, University of Chicago Press, vol. 51(3), pages 413-38, July.
  9. Mitsui, Toshihide & Watanabe, Shinichi, 1989. "Monetary growth in a turnpike environment," Journal of Monetary Economics, Elsevier, vol. 24(1), pages 123-137, July.
  10. Townsend, Robert M, 1987. "Economic Organization with Limited Communication," American Economic Review, American Economic Association, vol. 77(5), pages 954-71, December.
  11. John H. Boyd & Arthur J. Rolnick, 1988. "A case for reforming federal deposit insurance," Annual Report, Federal Reserve Bank of Minneapolis.
  12. Neil Wallace, 1988. "Another attempt to explain an illiquid banking system: the Diamond and Dybvig model with sequential service taken seriously," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 3-16.
  13. English, William B., 1993. "The decline of private deposit insurance in the United States," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 38(1), pages 57-128, June.
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