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On the other hand, the Commissioners appeared clear on instances where they did not recognize a provision as containing a legally demandable right.
As the term to maturity goes to zero, such a contract becomes a demandable debt that gives the customer the legal right to reclaim (and transfer, if it is a checking account) any part of the deposited sum on any date, but that also allows the bank to continue using the sum until the date the depositor actually reclaims it.
Diamond and I also explain why we would not see industrial firms financing themselves with demandable deposits.
As these intermediaries do not tie demandable liabilities to nonmarketable assets, there appears to be little threat of panic to MMMFs from commercial paper defaults or to nonbank lenders from the failure of some of their number.
Issuance of demandable or short-maturity debt helps to ameliorate the conflicts between bank debtholders (including depositors) and equityholders (or bank management) resulting from leverage, adverse selection, and moral hazard.
Relative to direct lending (that is, savers lending directly to borrowers), banks issue safe, demandable deposits, thus removing the need for savers to monitor the risk-taking behavior of these institutions.
In other words, the check represents a demandable debt.
This in turn decreases bank net worth, since a bank's loans, which pay off only in the long run, fall in value as the real interest rate rises, but the bank's liabilities of demandable deposits do not have a corresponding fall in value.
Second, the fact that banks finance through large quantities of demandable debt allows nervous depositors to withdraw from the bank rather than wait to see whether their bank will survive or fail.