BANKS, PAYMENTS, AND COORDINATION

Banks are modeled as Bryant/Diamond-Dybvig ''insurers'' against the ri sk of early consumption. Consumption claims must be verified by cleari ng and settlement. A clearinghouse does this efficiently as long as ba nks are sufficiently liquid. If liquidity requirements cannot be enfor ced against all banks, then the threat of panics is necessary to induc e banks to hold sufficient liquidity. If the clearinghouse can issue e mergency currency, then banks can coexist with less liquid institution s. However, if banks' return to holding reserves is low during ''norma l times,'' then there must be times when the return to liquidity is ab normally high. We associate these episodes with the panics of the Nati onal Banking Era. Journal of Economic Literature Classification Number s: 042, 311, 314. (C) 1995 Academic Press, Inc.