AEA Papers and Proceedings
ISSN 2574-0768 (Print) | ISSN 2574-0776 (Online)
Competitive Bank Liability Design
AEA Papers and Proceedings
(pp. 426–432)
Abstract
We study how competitive banks design liabilities that function as money in an economy with asymmetric information. Assets differ in risk exposure, and sufficiently risky assets cannot circulate in decentralized trade. Banks commit to state-contingent payoffs and transform asset payoffs through bundling and tranching. In equilibrium, banks issue money as a liquid but risky liability that circulates in payments as well as an illiquid residual claim. Liquidity creation (i.e., money provision) relies on holding illiquid, risky assets and is enhanced by bundling safe and risky assets. Regulation of bank balance sheets should internalize these monetary provision and risk transformation roles.Citation
Bigio, Saki, Pierre-Olivier Weill, and Diego Zúñiga. 2026. "Competitive Bank Liability Design." AEA Papers and Proceedings 116: 426–432. DOI: 10.1257/pandp.20261022Additional Materials
JEL Classification
- D82 Asymmetric and Private Information; Mechanism Design
- E42 Monetary Systems; Standards; Regimes; Government and the Monetary System; Payment Systems
- G21 Banks; Depository Institutions; Micro Finance Institutions; Mortgages
- G28 Financial Institutions and Services: Government Policy and Regulation