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Bank capital adequacy versus deposit insurance.

Dowd, K. (2000) 'Bank capital adequacy versus deposit insurance.', Journal of financial services research., 17 (1). pp. 7-15.


This paper re-evaluates the Diamond-Dybvig analysis of deposit insurance by constructing a model in which an agent not in need of liquidity sets up a financial intermediary to sell liquidity insurance to other agents who desire such insurance. This intermediary resembles a real-world bank in that it is financed by both demand deposits and equity. It also dominates the Diamond-Dybvig intermediary, which is funded only by demand deposits. Provided the intermediary has adequate capital, it also is perfectly safe. Deposit insurance then is both unnecessary and incapable of achieving a superior outcome to that which private agents could achieve on their own.

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Publisher statement:Reprinted from Journal of Financial Services Research, 17(1), 2000, 7-15, with permission of Kluwer Law International.
Record Created:03 Jun 2016 12:35
Last Modified:07 Jun 2016 13:47

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