Banking as the provision of liquidity

Article Abstract:

A model economy is presented in which demand deposits represent the optimal financial intermediation agreement. The intermediary, or 'bank', is subject to panics because the demand deposits are backed by illiquid assets. During these panics, each agent makes a rational choice to withdraw deposits, to the detriment of all agents. The only way in which banks can prevent these panics is to distort the optimal contract. Panics can be prevented without distortion if the government guarantees the return from deposits. The government is induced to regulate the portfolio and returns of the intermediary because of the moral hazard introduced by deposit insurance.

Financial institutions, Liquidity (Finance)

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Bank foreign lending, mandatory disclosure rules, and the reaction of bank stock prices to the Mexican debt crisis

Article Abstract:

The effect of the Mexican debt moratorium of August 1982 on bank valuation is examined. One result of the Mexican default was the enactment of new regulations requiring banks to publicly disclose their foreign lending exposure. An examination of relevant empirical evidence suggests that investors were able to distinguish between the banks with high and low levels of foreign debt exposure, even without the disclosure regulations.

Case studies, Finance, Risk management, Developing countries, Mexico, Foreign loans

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