Another Attempt to Explain an Illiquid Banking System: The Diamond and Dybvig Model With Sequential Service Taken Seriously

Wallace, Neil

doi:10.21034/qr.1241

Cited by 177 publications

(136 citation statements)

References 4 publications

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“…Wallace (1990) suggests that bank runs might be efficient. Examples of efficient bank runs were provided byAlonso (1996) andAllen and Gale (1998).…”

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confidence: 99%

Financial Intermediaries and Markets

2004

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A complex financial system comprises both financial markets and financial intermediaries. We distinguish financial intermediaries according to whether they issue complete contingent contracts or incomplete contracts. Intermediaries such as banks that issue incomplete contracts, e.g., demand deposits, are subject to runs, but this does not imply a market failure. A sophisticated financial system-a system with complete markets for aggregate risk and limited market participation-is incentive-efficient, if the intermediaries issue complete contingent contracts, or else constrained-efficient, if they issue incomplete contracts. We argue that there may be a role for regulating liquidity provision in an economy in which markets for aggregate risks are incomplete. Copyright The Econometric Society 2004.

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“…Wallace (1990) suggests that bank runs might be efficient. Examples of efficient bank runs were provided byAlonso (1996) andAllen and Gale (1998).…”

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confidence: 99%

Financial Intermediaries and Markets

2004

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“…not dominated by liquidating early and reinvesting. If R 2 1 , R 2 , the investment has an`irreversibility, or goods-in-process, feature' (Wallace, 1988): leaving the investment in place for two periods yields strictly higher returns than a sequence of short-term investments. 2 The model describes a situation in which agents are facing a liquidity problem, in the sense that they may be forced to consume their investments when these have not yet matured.…”

Section: The Basic Modelmentioning

confidence: 99%

“…In response to this critique, Diamond (1997) has extended the original model in two directions, so as to integrate banks as liquidity providers into a model of market trading. These two extensions are, ®rst, to consider two real investment opportunities instead of one and, second, building on Wallace (1988), to assume that agents are partially separated, i.e. that market access is limited.…”

Section: Banks and Markets In An Extended Modelmentioning

confidence: 99%

“…There are two interpretations of such a model of limited interaction. The ®rst is in terms of a fully speci®ed one-good economy with separated agents in Wallace's (1988) sense, in which each agent has access to the given physical production process. Alternatively, one can see it as a partial equilibrium model of banking with individual selling and buying, where (R 1 , R 2 ) represents each agent's market investment opportunity (`the market portfolio'), without trade being explicitly modelled.…”

Section: Banks and Markets In An Extended Modelmentioning

confidence: 99%

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Liquidity Creation through Banks and Markets: A Theoretical Perspective on Securitization

Thadden

2000

Economic Notes

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Securitization is a process that transforms some traditional nontraded banking assets into marketable securities. To evaluate this process, this paper surveys theories of the intertemporal allocation of funds through demand deposits and anonymous markets, ®rst separately and then in an integrated model. It reviews some work on the role of market frictions and asset characteristics, and concludes that the interplay between these two is crucial in explaining the observed co-existence of demand deposits and anonymous markets. This suggests that securitization is an opportunity, rather than a threat, to banks.

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“…Recently, Allen and Gale (2004), who study a DD model with uncertain asset payoffs and aggregate preferences, corroborate that if financial intermediaries are redundant if agents can trade assets on their own. 4 To overcome the Jacklin critique, Wallace (1988) assumes that agents are spatially separated, making trade impractical. Depositors are represented as campers who may wake up hungry at night, but do not want to wake up fellow campers to trade with them.…”

Section: Introductionmentioning

confidence: 99%

Risk Sharing in a World with Processing Costs: Trading versus Banking

Bommel¹

2008

Financial Market

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We analyze the bank versus exchange problem in a Diamond Dybvig (1983) economy with exogenous transaction processing costs. We find that processing costs in the market enables the bank to overcome the side trade threat (Jacklin (1987)) and offer some desirable liquidity insurance. Moreover, in the bank equilibrium processing costs are proportional to consumption, while in the market economy early and late consumers incur equal costs. These two effects explain that for a given level of aggregate processing costs, the bank economy is superior. On the other hand, the number of transactions in the bank economy is larger. It is for this reason that if processing costs are proportional to transaction value, and independent of the mechanism used, the exchange economy is superior.

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Another Attempt to Explain an Illiquid Banking System: The Diamond and Dybvig Model With Sequential Service Taken Seriously

Cited by 177 publications

References 4 publications

Financial Intermediaries and Markets

Financial Intermediaries and Markets

Liquidity Creation through Banks and Markets: A Theoretical Perspective on Securitization

Risk Sharing in a World with Processing Costs: Trading versus Banking

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