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The Banks' Swansong: Banking and the Financial Markets under Asymmetric Information

Jungu Yang ()
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Jungu Yang: Economic Research Institute, The Bank of Korea

No 2018-16, Working Papers from Economic Research Institute, Bank of Korea

Abstract: Bank runs may serve to communicate information across agents, and thus enhance rather than thwart allocation efficiency by making the fundamentals determine the asset prices. Figuratively speaking, banks die (go bankrupt) singing a swan song (revealing hidden information). In this way bank runs help uninformed agents to achieve efficient allocation under the condition of asymmetric information in the financial markets. The production of information is done efficiently without cost a point which distinguishes between this paper from most other related studies. The efficiently bank runs provide new ground for the coexistence of banks and financial markets. Even when all agents deposit their whole endowment of goods with the bank, the markets play their role in allocating resources once efficient bank runs happen. Allowing a run implies that investment in liquidity can be minimized, and the expected utility of uninformed agents thus increased. The role of banks is strengthened when agents have limited access to the markets.

Keywords: Financial intermediation; Financial markets; Bank runs; Asset price; Asymmetric information; Information acquisition; Limited participation; Liquidity (search for similar items in EconPapers)
JEL-codes: D4 D5 D8 G1 G2 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban and nep-upt
Date: 2018-06-15
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