CHAPTER 2 Fragile banks
2.1 Introduction
In this chapter, we focus on the role of banks as liquidity providers. We start motivating the needs for liquidity service by a very simple financial friction, that people with investment opportunities—call them “projects” or “assets”—face uncertainties in their preferred timing for consumption. Some investment projects are liquid, that they need only a short time to return, and their returns are usually low—for example, putting cash in a safe deposit box. In contrast, some investment projects are illiquid, that they need time to mature; if an illiquid project matures, its return is usually higher, but if it is interrupted prematurely, or liquidated, its value is much lower. ...
Get The Economics of Banking now with the O’Reilly learning platform.
O’Reilly members experience books, live events, courses curated by job role, and more from O’Reilly and nearly 200 top publishers.
