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Banks versus Markets in Processing the Payments Shock

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  • Dmitri Vinogradov

    (Alfred Weber Institute, Heidelberg University, Germany)

Abstract

The paper focuses on a comparison of bank-based andmarket-based …nancial systems with respect to their ability to smooth the negative consequences of a macroeconomic shock. The model describes a two-market OLG economy with two types of agents (workers and entrepreneurs) and a financial system represented through either banks or a direct market. The dynamic setting allows for a comparison regarding the speed of economic recovery after the shock. The principal finding is that the market-based system provides better arrangements to speed up the recovery, but concentrates the burden of the shock in one period. In contrast, the bank-based system allows for both quick recovery and postponing and smoothing the negative consequences of the shock over several periods, if proper regulation and interventions are used, otherwise the banking system can collapse. As an example of regulatory interventions, liquidity provisions and a deposit rate ceiling are considered. This allows to give some light on the di¤erence between the roles the Deposit Insurer and the Regulator (LOLR) can play in the evolution of events. In particular, deposit insurance alone can not provide an intertemporal shock smoothing and requires additional regulatory interventions. The Paper is presented at the 22nd Symposium on Banking and Monetary Economics held in June 2005 in Strasbourg

Suggested Citation

  • Dmitri Vinogradov, 2005. "Banks versus Markets in Processing the Payments Shock," Finance 0506004, EconWPA.
  • Handle: RePEc:wpa:wuwpfi:0506004 Note: Type of Document - pdf; pages: 27
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    File URL: http://econwpa.repec.org/eps/fin/papers/0506/0506004.pdf
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    References listed on IDEAS

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    1. Valerie R. Bencivenga & Bruce D. Smith, 1991. "Financial Intermediation and Endogenous Growth," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 195-209.
    2. Hans Gersbach & Jan Wenzelburger, 2003. "The Workout of Banking Crises: A Macroeconomic Perspective," CESifo Economic Studies, CESifo, vol. 49(2), pages 233-258.
    3. Dmitri Vinogradov, 2003. "Macroeconomic evolution after a shock: the role for financial intermediation," Macroeconomics 0310007, EconWPA.
    4. Allen, Franklin & Gale, Douglas, 1997. "Financial Markets, Intermediaries, and Intertemporal Smoothing," Journal of Political Economy, University of Chicago Press, vol. 105(3), pages 523-546, June.
    5. Rochet, Jean-Charles, 2004. "Macroeconomic shocks and banking supervision," Journal of Financial Stability, Elsevier, pages 93-110.
    6. Bolton, Patrick, 2002. "Banking in Emerging Markets," Journal of Financial Intermediation, Elsevier, vol. 11(4), pages 362-365, October.
    7. Frederic S. Mishkin, 2001. "Financial Policies and the Prevention of Financial Crises in Emerging Market Countries," NBER Working Papers 8087, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Financial intermediation; Bank-based system; Market-based system; Regulation; Lelnder of Last Resort; Deposit Insurance;

    JEL classification:

    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E53 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Deposit Insurance
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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