Both authors from Finance Department, The Wharton School, University of Pennsylvania. A previous version of this paper was entitled “Transactions Contracts.” The comments and suggestions of Mark Flannery, Jeff Lacker, Chris James, Dick Jefferis, Bruce Smith, Chester Spatt, an anonymous referee, members of the University of Pennsylvania Macro Lunch Group, especially Randy Wright and Henning Bohn, and participants in the 1988 NBER Summer Institute, the 1988 Garn Institute Conference on Federal Deposit Insurance and the Structure of Financial Markets, the 1988 Winter Econometric Society Meetings, and the Federal Reserve Bank of Richmond were greatly appreciated. The first author thanks the NSF for financial support through #SES-8618130. Errors remain the authors'.
Financial Intermediaries and Liquidity Creation
Article first published online: 30 APR 2012
1990 The American Finance Association
The Journal of Finance
Volume 45, Issue 1, pages 49–71, March 1990
How to Cite
GORTON, G. and PENNACCHI, G. (1990), Financial Intermediaries and Liquidity Creation. The Journal of Finance, 45: 49–71. doi: 10.1111/j.1540-6261.1990.tb05080.x
- Issue published online: 30 APR 2012
- Article first published online: 30 APR 2012
Trading losses associated with information asymmetries can be mitigated by designing securities which split the cash flows of underlying assets. These securities, which can arise endogenously, have values that do not depend on the information known only to informed agents. Bank debt (deposits) is an example of this type of liquid security which protect relatively uninformed agents, and we provide a rationale for deposit insurance in this content. High-grade corporate debt and government bonds are other examples, implying that a money market mutual fund-based payments system may be an alternative to one based on insured bank deposits.