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| Author: | Niinimäki, J.-P. |
| Title: | Intertemporal diversification in financial intermediation |
| Journal: | Journal of Banking and Finance
2001 : MAY, VOL. 25:5, p. 965-991 |
| Index terms: | Intermediate technology Banking Investors Control systems Equity capital |
| Language: | eng |
| Abstract: | This paper examines the incentive problem between a bank and depositors: limited liability makes risk-shifting lucrative. The author shows how intertemporal diversification of lending decisions - i. e. bank's loan portfolio consists of overlapping long-term loans and is thus gradually renewed - may solve the incentive problem of risk shifting. A new bank sets a high-equity level and acquires depositors' confidence. Maturity mismathch - illiquidity of long-term loans and liquidity of deposits - is optimal. |
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