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| Author: | Ennis, H. M. |
| Title: | Loanable Funds, Monitoring and Banking |
| Journal: | European Finance Review
2001 : VOL. 5:1-2, p. 79-114 |
| Index terms: | FUNDS LOANS BANKING BANKS |
| Language: | eng |
| Abstract: | This paper studies financial intermediation in a general equilibrium overlapping generations model. Indivisible investment projects combine with informational imperfections to create a (hidden action) moral hazard problem and introduce a role of third-party monitoring. Agency costs at the intermediary level are also considered. Under some conditions, monitors can be viewed as banks facing a non-trivial portfolio diversification problem. Equilibria are derived in which a large nationwide bank coexists with a number of community-regional banks, a structure of strong empirical relevance. Policies such as a mandatory reserve requirement are shown to have substantial effects on the levels of investment in the economy. |
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