Bank Runs, Deposit Insurance, and Liquidity

Diamond, Douglas W.; Dybvig, Philip H.

doi:10.21034/qr.2412

Cited by 1,738 publications

(3,025 citation statements)

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“…According to the modern theory of financial intermediation, one of the two central roles played by banks is liquidity creation. Bryant (1980) and Diamond and Dybvig (1983) suggest that banks create liquidity on the balance sheet by financing relatively long-term illiquid assets with relatively short-term liquid liabilities. Holmstrom and Tirole (1998) and Kashyap, Rajan, and Stein (2002) argue that banks also create liquidity off-balance sheet by offering loan commitments and generating similar claims to liquid funds.…”

Section: Introductionmentioning

confidence: 99%

Bank Capital and Liquidity Creation in Asia Pacific

Fung¹,

Lin

Molyneux

2015

Economic Inquiry

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We calculate liquidity creation for a large sample of commercial banks in 14 AsiaPacific economies from 2005 to 2012. We find that banks in this region created $7.83 trillion in liquidity in 2012, or approximately 3.24 times the total liquidity created in 2005. Large banks and those based in Developing Asia created the highest liquidity. We also investigate the bicausal relationship between liquidity creation and regulatory capital and find that the trade-off between the benefits of financial stability induced by enhanced capital requirements and those of higher liquidity creation is applicable to all of the sample banks, regardless of bank size and economic region. (JEL G21, G28)

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Section: Introductionmentioning

confidence: 99%

Bank Capital and Liquidity Creation in Asia Pacific

Fung¹,

Lin

Molyneux

2015

Economic Inquiry

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“…A second group of studies documents channels of contagion across financial institutions. A number of channels have been documented, including depositors' expectations (Diamond & Dybvig, 1983), information asymmetry between banks and depositors about the true value of loans (Gorton, 1985;Chari & Jagannathan, 1988), and overlapping claims across banks (Allen & Gale, 2000); a similarity in these studies is the idea that contagion of banks within or across countries spreads from the liability side of balance sheet. In contrast, Tian et al (2013) argue that contagion arises from uncertainties of bank assets.…”

Section: Methodsmentioning

confidence: 99%

Contagion Risk for Australian Authorised Deposit‐Taking Institutions

Akhter

Hasan

2015

Economic Record

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This paper investigates the contagion risk for Australian‐owned authorised deposit‐taking institutions (ADIs) spilling from the US and UK banks. We hypothesised that Australian ADIs are prone to extreme shocks experienced by their US and UK counterparts. We define four discrete events for the Australian banking sector in terms of the number of banks exceeding an extreme value at some time. The extreme value is defined as the 90th percentile on the negative tail of the distribution of changes in the distance to default obtained through the Black–Scholes–Merton formula. Then we fit a multinomial logistic model (MLM) to relate these events to the number of exceedances (extreme events) occurring in the US and the UK in the previous day for the time period from September 2006 to September 2011. The MLM estimates reveal strong contagion effects for Australian ADIs from the US and UK banks.

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“…Banking/finance models Banking/finance models capture the state-dependent nature of assets and contracts (e.g. Diamond and Dybvig 1983;Diamond and Rajan 2001). In these models, financial contracts are affected by informational asymmetries, commitment and incentives problems that can result in default.…”

Section: Theory-based Approachesmentioning

confidence: 99%

What Do We Know About the Effects of Macroprudential Policy?

2017

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The literature on the effectiveness of macroprudential policy tools is still in its infancy and has so far provided only limited guidance for policy decisions. In recent years, however, increasing efforts have been made to fill this gap. Progress has been made in embedding macroprudential policy in theoretical models. There is increasing empirical work on the effect of some macroprudential tools on a range of target variables, such as quantities and prices of credit, asset prices, and on the amplitude of the financial cycle and financial stability. In this paper we provide a critical review of recent progress in theoretical and empirical research on the effectiveness of macroprudential instruments.

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Bank Runs, Deposit Insurance, and Liquidity

Abstract: This publication primarily presents economic research ai med at improving policymaking by the Federal Reserve System and other governmental authorities.

Cited by 1,738 publications

References 6 publications

Bank Capital and Liquidity Creation in Asia Pacific

Bank Capital and Liquidity Creation in Asia Pacific

Contagion Risk for Australian Authorised Deposit‐Taking Institutions

What Do We Know About the Effects of Macroprudential Policy?

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