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Cover of: Maturity Transformation without Maturity Mismatch and Bank Panics
Juha-Pekka Niinimäki

Maturity Transformation without Maturity Mismatch and Bank Panics

Section: Articles
Volume 159 (2003) / Issue 3, pp. 511-522 (12)
Published 09.07.2018
DOI 10.1628/0932456032954747
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Summary
We demonstrate that a bank can offer demand deposits and yet avoid bank runs without deposit insurance if it also offers time deposits that have a low liquidation value. Self-fulfilling runs do not occur, as maturity mismatch is eliminated. To do this, we modify DIAMOND AND DYBVIG's [1983] model so that depositors have differing risks of encountering a preference shock. We show that high-risk depositors will hold their savings as demand deposits, whereas low-risk depositors will prefer time deposits. These deposit choices transfer liquidity optimally from low-risk to high-risk depositors, who place the highest value on liquidity.