We report evidence that bank liquidity ratios (liquid assets as a percentage of total assets) decrease during the process of economic development. To reconcile this observation with the increasing importance of financial markets and the increasing direct participation of individual investors in...

How does the availability of alternative investment opportunities for banks' depositors affect the reaction of the banking system to aggregate liquidity shocks? And what are the implications, if any, for banking regulation? To answer these questions, I study a Diamond-Dybvig environment, where...