Banks versus Markets in Processing the Payments Shock

Dmitri Vinogradov

Finance from EconWPA

Abstract: The paper focuses on a comparison of bank-based andmarket-based …nancial systems with respect to their ability to smooth the negative consequences of a macroeconomic shock. The model describes a two-market OLG economy with two types of agents (workers and entrepreneurs) and a financial system represented through either banks or a direct market. The dynamic setting allows for a comparison regarding the speed of economic recovery after the shock. The principal finding is that the market-based system provides better arrangements to speed up the recovery, but concentrates the burden of the shock in one period. In contrast, the bank-based system allows for both quick recovery and postponing and smoothing the negative consequences of the shock over several periods, if proper regulation and interventions are used, otherwise the banking system can collapse. As an example of regulatory interventions, liquidity provisions and a deposit rate ceiling are considered. This allows to give some light on the di¤erence between the roles the Deposit Insurer and the Regulator (LOLR) can play in the evolution of events. In particular, deposit insurance alone can not provide an intertemporal shock smoothing and requires additional regulatory interventions. The Paper is presented at the 22nd Symposium on Banking and Monetary Economics held in June 2005 in Strasbourg

Keywords: Financial intermediation; Bank-based system; Market-based system; Regulation; Lelnder of Last Resort; Deposit Insurance (search for similar items in EconPapers)
JEL-codes: D50 G21 G28 E44 E53 O16 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fin, nep-fmk and nep-mac
Date: 2005-06-07
Note: Type of Document - pdf; pages: 27
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpfi:0506004

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