In this paper, we show that abandoning the Diamond and Dybvig hypothesis of a unique bank representing the entire banking system gives rise to the possibility of endogenizing the interbank exchanges. In a system characterized by uncertainty regarding the moment of withdrawal of deposits, access to interbank liquidity decreases the bank risk of failure and bank runs. The possibility, moreover, to invest excess liquidity in the interbank market at a positive interest rate increases expected bank profits.
Interbank lending, liquidity and banking crises / P. Brighi. - In: ECONOMIC NOTES. - ISSN 0391-5026. - 31:3(2002 Nov), pp. 493-521. [10.1111/1468-0300.00095]
Interbank lending, liquidity and banking crises
P. Brighi
2002
Abstract
In this paper, we show that abandoning the Diamond and Dybvig hypothesis of a unique bank representing the entire banking system gives rise to the possibility of endogenizing the interbank exchanges. In a system characterized by uncertainty regarding the moment of withdrawal of deposits, access to interbank liquidity decreases the bank risk of failure and bank runs. The possibility, moreover, to invest excess liquidity in the interbank market at a positive interest rate increases expected bank profits.
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Economic Notes - 2003 - Brighi - Interbank Lending Liquidity and Banking Crises.pdf
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