Run-prone banking and asset markets

Marie Hoerova ()

No 845, Working Paper Series from European Central Bank

Abstract: I analyze the role that asset markets play in the performance and stability of the run-prone banking sector. Banks insure consumers against privately observed liquidity shocks. Asset market investments insure consumers against losses from bank runs. If the probability of a run is small, then banks specialize fully into the provision of liquidity insurance: They provide a higher degree of liquidity insurance when compared to the economy with banks alone. If the probability of a run is high, consumers prefer to invest solely through the asset market. Insurance against runs provided by the market investment reduces consumers' incentives to run. Increased provision of liquidity insurance by banks has the opposite effect. I derive conditions under which the latter effect dominates and the probability of a run is higher than with banks alone. JEL Classification: E44, G21.

Keywords: Bank runs; asset markets; liquidity; financial stability; mechanism design. (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban
Date: 2007-12
View list of references

Downloads: (external link)
http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp845.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:ecb:ecbwps:20070845

Ordering information: This working paper can be ordered from
Press and Information Division, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany

Access Statistics for this paper

More papers in Working Paper Series from European Central Bank
Address: Postfach 16 03 19, Frankfurt am Main, Germany
Contact information at EDIRC.
Series data maintained by Official Publications ().