The Role of Demandable Debt in Structuring Optimal Banking Arrangements

Articles:

Title:: The Role of Demandable Debt in Structuring Optimal Banking Arrangements
Author(s):: Calomiris, Charles W.
Kahn, Charles M.
Date:: 1991
Type:: Articles
Department:: Business
Volume:: 81
Permanent URL:: http://hdl.handle.net/10022/AC:P:10882
Book/Journal Title:: American Economic Review
Abstract:: Demandable-debt finance by banks warrants explanation because it entails costs of bank suspension, liquidation, and idle reserve holdings. An explanation is developed in which demandable debt provides incentive-compatible intermediation where the banker has comparative advantage in allocating investment funds but may act against the interests of uniformed depositors. Demandable debt attracts funds by giving depositors an option to force liquidation. Its usefulness in transacting follows from information-sharing between monitors and nonmonitors.
Subject(s):: Economics
Banking