Banking intermediaries help to coordinate different agents’ plans, reducing the uncertainty that might otherwise hamper transactions because of disruptive “lemon” problems. By establishing trust relationships based on private information, banks allow risk pooling and provide insurance to...

This paper proposes a dynamic model of the optimal choices of a bank that benefits from market power and takes into account the impact of the deposit generation process. Interbank lending/borrowing emerges as a buffer that assists the bank in smoothing intertemporal adjustments in interdependent...