Liquidity Creation without Banks

Simas Kucinskas
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Simas Kucinskas: VU University Amsterdam, the Netherlands

No 15-101/VI, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: I revisit the Diamond-Dybvig model of liquidity insurance in the presence of hidden trades. The key result is that in this environment deposit-taking banks are not necessary for the efficient provision of liquidity. Mutual funds are constrained efficient when supplemented with the same government liquidity regulation that is required to make a banking system constrained efficient. However, whereas banks are potentially subject to costly panics, mutual funds are not run-prone and hence superior from a welfare perspective if runs happen with a non-zero probability.

Keywords: Liquidity creation; liquidity insurance; hidden trades; bank runs; mutual funds; narrow banking; financial stability (search for similar items in EconPapers)
JEL-codes: D91 E61 G21 G23 G28 (search for similar items in EconPapers)
Date: 2015-08-20
New Economics Papers: this item is included in nep-ban, nep-ias and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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