Chapter 6: Banks' liquidity preference and financial provision
6. Banks’ liquidity preference and ﬁnancial provision Penelope Hawkins* INTRODUCTION This chapter explores the liquidity preference of banks as an explanation for diﬀerential ﬁnancial provision to borrowers. While some borrowers may have ﬁrst call on a bank’s resources, others are unable to obtain credit, and hence are constrained by ﬁnancial exclusion. Still others may remain on the fringe, with capricious access to credit leaving them ﬁnancially vulnerable. The paper suggests that liquidity preference presents a possible conceptual framework within which to develop a model of banks’ distributive behavior toward diﬀerent types of borrowers within the framework of an endogenous money supply. The spectrum of ﬁnancial provision presented below may also provide insight into the transmission of monetary policy. The spectrum of ﬁnancial exclusion may be seen against the background of an endogenous money supply where the banks seek proﬁts through actively managing their balance sheets, as guided by their preference for liquidity. This approach, which may be termed the conditionally endogenous approach to the money supply, is associated with the work of Minsky (1982), Chick (1983), Dow (1993, 1996), Dow and Dow (1989) and Carvalho (1992, 1999) and contrasts with the passive accommodation attributed to the banking sector by the horizontalists. The spectrum of ﬁnancial provision suggests that at one extreme will be those who are excluded from ﬁnancial provision. To be ﬁnancially excluded means to be denied access to command over liquidity. In a monetary economy, with a developed banking sector, this can mean exclusion from...
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