Article Abstract:
A model economy is presented in which demand deposits represent the optimal financial intermediation agreement. The intermediary, or 'bank', is subject to panics because the demand deposits are backed by illiquid assets. During these panics, each agent makes a rational choice to withdraw deposits, to the detriment of all agents. The only way in which banks can prevent these panics is to distort the optimal contract. Panics can be prevented without distortion if the government guarantees the return from deposits. The government is induced to regulate the portfolio and returns of the intermediary because of the moral hazard introduced by deposit insurance.
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Article Abstract:
The effect that the Continental Illinois National Bank crises had on the banking industry's performance is investigated. The stock prices and the volume of stock sales are examined for sixty-eight actively traded banks. In the weeks after the crisis, the trading volume of the banks increased by approximately 50%, and 42 of the 67 banks had negative abnormal returns, with more pronounced effects on banks with questionable solvency. This reaction could be attributable to either a market adjustment to the information which was disclosed during the crises or to a fear of a run on banks.
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Article Abstract:
The effect of the Mexican debt moratorium of August 1982 on bank valuation is examined. One result of the Mexican default was the enactment of new regulations requiring banks to publicly disclose their foreign lending exposure. An examination of relevant empirical evidence suggests that investors were able to distinguish between the banks with high and low levels of foreign debt exposure, even without the disclosure regulations.
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