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Oxford Economic Papers Advance Access originally published online on November 21, 2007
Oxford Economic Papers 2008 60(3):440-461; doi:10.1093/oep/gpm041
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Right arrow G21 - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
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© Oxford University Press 2007 All rights reserved

Financial intermediation, monitoring, and liquidity

François Marini

University Paris-Dauphine, Place du Maréchal de Lattre de Tassigny, 75 775 Paris cedex 16, FRANCE; e-mail: Francois.Marini{at}dauphine.fr


  Abstract

This paper constructs a theoretical model that integrates the two objectives of capital adequacy requirements and deposit insurance, namely avoiding banking crises and protecting small depositors. The paper also addresses the related question: why do banks fund loans with both equity and demand deposits? The model determines the optimal bank capital structure. In comparison with a Diamond-Dybvig bank which funds loans with demand deposits only, a capitalized financial intermediary provides liquidity to its depositors at a lower cost, and channels more funds to the most efficient investments. The model identifies the sources of market failure that may justify banking regulation.

Key Words: JEL classifications: G21 • G28


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