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| Author: | Fecht, F. |
| Title: | On the stability of different financial systems |
| Journal: | Journal of the European Economic Association
2004 : DEC, VOL. 2:6, p. 969-1014 |
| Index terms: | economic stability FINANCIAL SERVICES |
| Language: | eng |
| Abstract: | An economy in which deposit-taking banks of Diamond and Dybvig style and a financial market coexist is modeled in a simple framework closely related to Diamond (1997). Solely depending on the fraction of naïve households who cannot efficiently invest in the corporate sector, two different types of financial systems emerge. With the fraction comparatively low, the evolving financial system can be interpreted as market-oriented, whereas a high fraction brings about a bank-dominated financial system. In market-oriented systems, banks only provide naïve households with access to efficient investments: in bank-dominated systems, banks' deposit contracts also offer some degree of liquidity insurance. Consequently, compared to market-oriented financial systems, the household sector in bank-dominated financial systems holds a larger portfolio fraction in deposits and a smaller part in direct investments. |
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