Liquidity Creation without Bank Panics and Deposit Insurance

This paper develops a panic-free bank system in an OLG model. A bank issues both demand deposits and time deposits (or bank stocks) so that the maturity-matching constraint is satisfied. The agents who cannot participate in capital markets put their savings in demand deposits; others favour marketable time deposits. Everyone receives a liquid saving asset, and the bank boosts the liquidity of the economy, even though it operates under maturity matching. The costs of stabilization are high if the bank's operating costs are substantial or if there are only a few agents who will participate in the capital markets without subsidies. (JEL: G 21, G 22, G 28)