Discount Window Lending and Deposit Insurance
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.
|Date of creation:||12 Apr 1995|
|Date of revision:||18 Apr 1995|
|Note:||Zipped using PKZIP v2.04, encoded using UUENCODE v5.15. Zipped file includes 4 files-- dep1.j95, gnuindex.sty, psfig.sty tcilatex.tex (files are in TEX format)|
|Contact details of provider:|| Web page: http://econwpa.repec.org|
References listed on IDEAS
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.:
- 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.
- Hornstein, Andreas & Krusell, Per, 1993. "Money and Insurance in a Turnpike Environment," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 3(1), pages 19-34, January.
- Cheng Wang & Stephen D. Williamson, 1993. "Adverse Selection in Credit Markets with Costly Screening," Finance 9310001, EconWPA, revised 02 Nov 1993.
- Champ, B. & Smith, B.D., 1991.
"Currency Elasticity and Banking Panics: theory and Evidence,"
University of Western Ontario, The Centre for the Study of International Economic Relations Working Papers
9109, University of Western Ontario, The Centre for the Study of International Economic Relations.
- Bruce Champ & Bruce D. Smith & Stephen D. Williamson, 1996. "Currency Elasticity and Banking Panics: Theory and Evidence," Canadian Journal of Economics, Canadian Economics Association, vol. 29(4), pages 828-864, November.
- 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).
- Boyd, J.H. & Gertler, M., 1993.
"U.S. Commercial Banking: Trends, Cycles, and Policy,"
93-19, C.V. Starr Center for Applied Economics, New York University.
- John H. Boyd & Mark Gertler, 1993. "U.S. Commercial Banking: Trends, Cycles, and Policy," NBER Chapters, in: NBER Macroeconomics Annual 1993, Volume 8, pages 319-377 National Bureau of Economic Research, Inc.
- John H. Boyd & Mark Gertler, 1993. "U.S. Commercial Banking: Trends, Cycles, and Policy," NBER Working Papers 4404, National Bureau of Economic Research, Inc.
- 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.
- Stephen D. Williamson, 1989.
"Restrictions on financial intermediaries and implications for aggregate fluctuations: Canada and the United States, 1870-1913,"
119, Federal Reserve Bank of Minneapolis.
- 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.
- Townsend, Robert M, 1987. "Economic Organization with Limited Communication," American Economic Review, American Economic Association, vol. 77(5), pages 954-971, December.
- John H. Boyd & Arthur J. Rolnick, 1988. "A case for reforming federal deposit insurance," Annual Report, Federal Reserve Bank of Minneapolis.
- 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.
- 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 413-438, July.
- Mitsui, Toshihide & Watanabe, Shinichi, 1989. "Monetary growth in a turnpike environment," Journal of Monetary Economics, Elsevier, vol. 24(1), pages 123-137, July.
When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpma:9504001. 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.