Having it Both Ways: A Theory of the Banking Firm with Time-Consistent and Time-Inconsistent Depositors

Carolina Laureti () and Ariane Szafarz

No 14-011, Working Papers CEB from ULB -- Universite Libre de Bruxelles

Abstract: Our equilibrium model determines the liquidity premium offered by a monopolistic bank to a pool of depositors made up of time-consistent and time-inconsistent agents. Time-consistent depositors demand compensation for illiquidity, whereas time-inconsistent ones are willing to forgo interest on illiquid savings accounts to discipline their future selves. We show that formal financial markets can reward time-inconsistent clients for illiquidity, even though these agents would agree to pay for it. The explanation combines two factors: the existence of reserve requirements making the bank keen to reward illiquid accounts more than liquid ones, and the presence of time-consistent agents who view illiquidity as a burden and therefore demand compensation for holding illiquid accounts.

Keywords: Deposit; commitment; flexibility; liquidity premium; hyperbolic discounting; Bangladesh (search for similar items in EconPapers)
JEL-codes: D53 D82 D91 G21 O12 O16 (search for similar items in EconPapers)
Pages: 52 p.
Date: 2014-05-26
New Economics Papers: this item is included in nep-ban, nep-bec, nep-cfn and nep-mfd
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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