RT Generic
T1 Why do banks promise to pay par on demand?
A1 Dwyer, Gerald P.
A1 Samartín, Margarita
AB We survey the theories of why banks promise to pay par on demand and examine evidence aboutthe conditions under which banks have promised to pay the par value of deposits and banknotes ondemand when holding only fractional reserves. The theoretical literature can be broadly divided into fourstrands: liquidity provision, asymmetric information, legal restrictions, and a medium of exchange. Weassume that it is not zero cost to make a promise to redeem a liability at par value on demand. If so, thenthe conditions in the theories that result in par redemption are possible explanations of why bankspromise to pay par on demand. If the explanation based on customers’ demand for liquidity is correct,payment of deposits at par will be promised when banks hold assets that are illiquid in the short run. Ifthe asymmetric-information explanation based on the difficulty of valuing assets is correct, themarketability of banks’ assets determines whether banks promise to pay par. If the legal restrictionsexplanation of par redemption is correct, banks will not promise to pay par if they are not required to doso. If the transaction explanation is correct, banks will promise to pay par value only if the deposits areused in transactions. After the survey of the theoretical literature, we examine the history of banking inseveral countries in different eras: fourth-century Athens, medieval Italy, Japan, and free banking andmoney market mutual funds in the United States. We find that all of the theories can explain some of theobserved banking arrangements, and none explain all of them.
PB Federal Reserve Bank of Atlanta
YR 2006
FD 2006
LK https://hdl.handle.net/10016/12797
UL https://hdl.handle.net/10016/12797
LA eng
DS e-Archivo
RD 1 sept. 2024