The Banks' Swansong: Banking and the Financial Markets Under Asymmetric Information

61 Pages Posted: 16 Jun 2018

See all articles by Jungu Yang

Jungu Yang

Bank of Korea - Economic Research Institute

Date Written: June 15, 2018

Abstract

Bank runs may serve to communicate information across agents, and thus enhance rather than thwart allocation efficiency by making the fundamentals determine the asset prices. Figuratively speaking, banks die (go bankrupt) singing a swan song (revealing hidden information). In this way bank runs help uninformed agents to achieve efficient allocation under the condition of asymmetric information in the financial markets. The production of information is done efficiently without cost a point which distinguishes between this paper from most other related studies. The efficiently bank runs provide new ground for the coexistence of banks and financial markets. Even when all agents deposit their whole endowment of goods with the bank, the markets play their role in allocating resources once efficient bank runs happen. Allowing a run implies that investment in liquidity can be minimized, and the expected utility of uninformed agents thus increased. The role of banks is strengthened when agents have limited access to the markets.

Keywords: Financial intermediation, Financial markets, Bank runs, Asset price, Asymmetric information, Information acquisition, Limited participation, Liquidity

JEL Classification: D4, D5, D8, G1, G2

Suggested Citation

Yang, Jungu, The Banks' Swansong: Banking and the Financial Markets Under Asymmetric Information (June 15, 2018). Bank of Korea WP 2018-16. Available at SSRN: https://ssrn.com/abstract=3196820 or http://dx.doi.org/10.2139/ssrn.3196820

Jungu Yang (Contact Author)

Bank of Korea - Economic Research Institute ( email )

110, 3-Ga, Namdaemunno, Jung-Gu
Seoul 100-794
Korea, Republic of (South Korea)

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