The Term-Structure of Investment and the Banks' Insurance Function

Ernst-Ludwig von Thadden

Cahiers de Recherches Economiques du Département d'économie from Université de Lausanne, Faculté des HEC, Département d’économie

Abstract: The article re-examines the proposition, first formulated by Bryant (1980) and Diamond and Dybcvig ( 1983), that in a production economy with stochastic liquidity shocks to the household sector, banks serve to provide optimal intertemporal insurance to consumers. The paper argues that in order to understand the moral hazard problems inherent in this insurance problem, it is too narrow to consider solely the role of banks as providers of liquidity. The paper develops a model with several investment opportunities in which banks have the additional function of asset diversification.

Keywords: banks; intermediation liquidity; maturity transformation; banks runs; incentive compatibility; diversification (search for similar items in EconPapers)
JEL-codes: D51 D92 G20 G21 (search for similar items in EconPapers)
Pages: 22 pages
Date: 1996-02
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Citations: View citations in EconPapers (3)

Published in European Economic Review, vol. 41 (7), July 1997, pp. 1355-1374

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Persistent link: https://EconPapers.repec.org/RePEc:lau:crdeep:9606

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