Journal of Financial Intermediation Vol. 7 No. 2 1998
Deposit Liquidity and Bank Monitoring
Abstract
Why do banks fund loans embodying considerable borrower-specific information with liquid deposits? I address this question by examining the disciplinary effect of liquid deposits in a framework where banks' production of nontransferable borrower information is explicitly considered. I show that deposit liquidity motivates banks to provide greater monitoring of their loan applicants despite the general lack of observability of bank monitoring and bank loan quality. The analysis provides an important link between the two activities in which banks are viewed as “special”—their liquidity provision through demand deposits and their lending to information-intensive borrowers.Journal of Economic LiteratureClassification Numbers: G21, G28.
- DOI
- 10.1006/jfin.1998.0236
- Volume
- 7
- Issue
- 2
- Pages
- 198-218
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref