Maturity Transformation without Maturity Mismatch and Bank Panics

Juha-Pekka Niinimäki

Journal of Institutional and Theoretical Economics (JITE), 2003, vol. 159, issue 3, 511-522

Abstract: We demonstrate that a bank can offer demand deposits and yet avoid bank runs without deposit insurance if it also offers time deposits that have a low liquidation value. Self-fulfilling runs do not occur, as maturity mismatch is eliminated. To do this, we modify Diamond and Dybvig"s [1983] model so that depositors have differing risks of encountering a preference shock. We show that high-risk depositors will hold their savings as demand deposits, whereas low-risk depositors will prefer time deposits. These deposit choices transfer liquidity optimally from low-risk to high-risk depositors, who place the highest value on liquidity.

JEL-codes: G21 G22 G28 (search for similar items in EconPapers)
Date: 2003
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