THE INVISIBLE HAND AND THE BANKING TRADE: SEIGNIORAGE, RISK-SHIFTING, AND MORE

Marcus Miller and Lei Zhang

Brussels Economic Review, 2013, vol. 56, issue 3-4, 365-388

Abstract: ABSTRACT:The classic Diamond-Dybvig model of banking assumes perfect competition and abstracts from issues ofmoral hazard. To reflect conditions prevailing in UK banking, however, we incorporate market powerand risk-taking by banks with limited liability, with explicit analytical results for the case wheredepositors are highly risk averse. We show how the effectiveness of bank franchise value in checkingrisk-taking may be undermined by the prospect of bailouts; and how bail-in provisions are beingdesigned to correct this.

Keywords: Money and banking; Seigniorage; Risk-taking; Bailouts; Regulation (search for similar items in EconPapers)
JEL-codes: E41 E58 G21 G28 (search for similar items in EconPapers)
Date: 2013
Note: Special Issue30th Symposium on Money, Banking and FinanceGuest editors: Christian Aubin, Noëlle Duport andDaniel Goyeau
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Related works:
Working Paper: The Invisible Hand and the Banking Trade: Seigniorage, Risk-shifting and More (2013)
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