Interbank Lending, Liquidity and Banking Crises

29 Pages Posted: 24 Feb 2003

See all articles by Paola Brighi

Paola Brighi

University of Bologna - Department of Management

Abstract

In this paper, we show that abandoning the Diamond and Dybvig hypothesis of a unique bank representing the entire banking system gives rise to the possibility of endogenizing the interbank exchanges. In a system characterized by uncertainty regarding the moment of withdrawal of deposits, access to interbank liquidity decreases the bank risk of failure and bank runs. The possibility, moreover, to invest excess liquidity in the interbank market at a positive interest rate increases expected bank profits.

JEL Classification: E52, G21

Suggested Citation

Brighi, Paola, Interbank Lending, Liquidity and Banking Crises. Available at SSRN: https://ssrn.com/abstract=368793

Paola Brighi (Contact Author)

University of Bologna - Department of Management ( email )

Via Capo di Lucca 34
Bologna 40126
Italy

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