The Banks' Swansong: Banking and the Financial Markets Under Asymmetric Information
61 Pages Posted: 16 Jun 2018
Date Written: June 15, 2018
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: Suggested Citation