Universität Bonn

Department of Economics

Maxi Günnewig & Yuliyan Mitkov - Uni Bonn

"Optimal Banking Arrangements: Liquidity Creation without Financial Fragility"

Abstract

Diamond and Rajan (2000, 2001) argue that banks create liquidity by issuing deposits to fund opaque firms that otherwise cannot obtain funding. Since banks issuing deposits are subject to runs, this resulting financial fragility is essential for liquidity creation. We revisit the Diamond-Rajan model of financial intermediation and show that a bank with an optimal financing structure is not subject to runs. The optimal contract rests on two simple notions. First, each bank creditor can seize a portion of the bank’s assets. Second, some creditors are more senior than others: their requests to seize assets are prioritized. In contrast to Diamond and Rajan, we find that financial fragility is detrimental to liquidity creation.

Additional information:

  • Speaker: Maxi Günnewig, Yuliyan Mitkov
  • Time: Thursday, 17.10.2024, 12:15 - 14:00
  • Location: Faculty Meetingroom, U 1.040
  • Further links:
  • Organizer: Finance Group
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