Charles Calomiris

The Role of Demandable Debt in Structuring Optimal Banking Arrangements

Coauthor(s): Charles Kahn.

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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 uninformed 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.

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Source: The American Economic Review
Exact Citation:
Calomiris, Charles, and Charles Kahn. "The Role of Demandable Debt in Structuring Optimal Banking Arrangements." The American Economic Review 81, no. 3 (June 1991): 497-513.
Volume: 81
Number: 3
Pages: 497-513
Date: 6 1991