1 / 9

Discussion of: “Money and Modern Banking without Bank Runs” (D. Skeie)

Discussion of: “Money and Modern Banking without Bank Runs” (D. Skeie). By: Giovanni Dell’Ariccia (IMF and CEPR). The paper shows that:. Deposit insurance is not necessary to prevent liquidity runs in advanced economies.

bevis-powers
Download Presentation

Discussion of: “Money and Modern Banking without Bank Runs” (D. Skeie)

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Discussion of: “Money and Modern Banking without Bank Runs” (D. Skeie) By: Giovanni Dell’Ariccia (IMF and CEPR)

  2. The paper shows that: • Deposit insurance is not necessary to prevent liquidity runs in advanced economies. • This contrasts with the classic Diamond-Dybvig multiple equilibria result. • It is interesting from a normative point of view, since most deposit insurance schemes are in advanced economies. • It is written as challenge to deposit insurance, but one could read it as in support (I do!)

  3. Advanced economies need to meet several conditions to avoid runs • Deposits are nominal and in domestic currency. • Well functioning good markets. • Bank liabilities cannot be converted to domestic assets held outside banking system. • There is a frictionless inter-bank market. • Free-floating currency (or closed economy).

  4. Nominal deposits / smooth good markets • In Diamond-Dybvig deposits are real, non-contingent claims on bank’s assets: • Early withdrawals cannot be correctly priced at the margin. • Quantities need to adjust → rationing for late withdrawers. • Potential inefficiency (liquidity runs) • In this paper deposits are nominal claims: • Price adjustments on good markets make their real value contingent on mass of deposits withdrawn (De Nicolo’, JME). • Early withdrawals are correctly priced. • First-best allocation is achieved (no runs).

  5. No currency and smooth inter-bank market • All transactions are settled within the banking system (this where advance vs. developing countries may matter): → aggregate liquidity cannot be drained. → inter-bank market is always “liquid enough”. • In systems with more than one bank, informational asymmetries absent: → banks always willing to lend to solvent but illiquid institutions.

  6. No role for foreign assets/goods • Flexible exchange rate: → central bank will not drain liquidity by intervening. → domestic price of foreign goods adjusts with mass of withdrawals (as long as current account needs to balance).

  7. So, to bring the runs back ... • Make real value of deposits non-contingent on withdrawals. • Get liquidity out of banking system. • Stop inter-bank lending.

  8. These may do (and some are actually out there): • Fixed exchange rate regime. • Sticky prices (?) – Inelastic import prices (?) • Off-shore market for deposits. • Storage of currency outside banking system. • Frictions in the inter-bank market. • Asymmetric information across banks.

  9. Highly recommended read • Very interesting and well-written paper. • Carefully modeled. Could benefit from some further discussion of foreign channel. • Should have more open interpretation of results: pro or contra deposit insurance?

More Related