Banks versus Markets in Processing the Payments Shock
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
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- Franklin Allen & Douglas Gale, 1995.
"Financial Markets, Intermediaries, and Intertemporal Smoothing,"
Center for Financial Institutions Working Papers
95-02, Wharton School Center for Financial Institutions, University of Pennsylvania.
- Allen, Franklin & Gale, Douglas, 1997. "Financial Markets, Intermediaries, and Intertemporal Smoothing," Journal of Political Economy, University of Chicago Press, vol. 105(3), pages 523-46, June.
- Franklin Allen & Douglas Gale, 1996. "Financial Markets, Intermediaries and Intertemporal Smoothing," Center for Financial Institutions Working Papers 96-33, Wharton School Center for Financial Institutions, University of Pennsylvania.
- Franklin Allen & Douglas Gale, 1995. "Financial markets, intermediaries, and intertemporal smoothing," Working Papers 95-4, Federal Reserve Bank of Philadelphia.
- Hans Gersbach & Jan Wenzelburger, 2003. "The Workout of Banking Crises: A Macroeconomic Perspective," CESifo Economic Studies, CESifo, vol. 49(2), pages 233-258.
- Rochet, Jean-Charles, 2004.
"Macroeconomic shocks and banking supervision,"
Journal of Financial Stability,
Elsevier, vol. 1(1), pages 93-110, September.
- Bolton, Patrick, 2002. "Banking in Emerging Markets," Journal of Financial Intermediation, Elsevier, vol. 11(4), pages 362-365, October.
- Dmitri Vinogradov, 2003. "Macroeconomic evolution after a shock: the role for financial intermediation," Macroeconomics 0310007, EconWPA.
- 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.
When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpfi:0506004. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA)
If references are entirely missing, you can add them using this form.