Discount Window Lending and Deposit Insurance

Stephen Williamson ()

Macroeconomics from EconWPA

Abstract: A banking model is constructed where roles for government- provided deposit insurance and discount window lending arise when there are restrictions on branch banking. Banks arise endogenously as an efficient arrangement for sharing risk. Discount window lending permits better risk sharing by making bank assets more liquid, but is limited because of a moral hazard problem which arises from adverse selection in the loan market. Deposit insurance also creates the potential for better risk sharing, but accomplishes this through contingent transfers rather than enhancing liquidity. Banks tend to take on more risk with deposit insurance and to take less care in screening loans, but this is consistent with an increase in welfare for depositors and borrowers.

JEL-codes: E (search for similar items in EconPapers)
Date: Written 1995-04-12
Note: Zipped using PKZIP v2.04, encoded using UUENCODE v5.15. Zipped file includes 4 files-- dep1.j95, gnuindex.sty, psfig.sty tcilatex.tex (files are in TEX format)
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Related works:
Working Paper: Discount Window Lending and Deposit Insurance (1995)
Journal Article: Discount Window Lending and Deposit Insurance
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