Market rate versus fixed rate demand deposits

In an economy with uninsured banks, market rate deposits are shown to provide services identical to fixed rate deposits without risking banking panics as long as there is not both aggregate uncertainty, about liquidity demands and asymmetric information about bank asset quality. However, if both fac...

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Bibliographic Details
Published in:Journal of monetary economics 1993-11, Vol.32 (2), p.237-258
Main Author: Jacklin, Charles J.
Format: Article
Language:English
Subjects:
Bank rates
Demand
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Summary:In an economy with uninsured banks, market rate deposits are shown to provide services identical to fixed rate deposits without risking banking panics as long as there is not both aggregate uncertainty, about liquidity demands and asymmetric information about bank asset quality. However, if both factors are present, then the preferred deposit form depends on the riskiness of bank assets and information revealed through market prices. The analysis may explain the evolution of fixed rate deposits before the introduction of deposit insurance. Moreover, it provides currently relevant insights regarding deposit contract forms and deposit insurance.
ISSN:0304-3932
1873-1295
DOI:10.1016/0304-3932(93)90004-Y