The paper performs a welfare comparison between demand deposit and equity contracts in the presence of intrinsic aggregate uncertainty. In this framework, the welfare dominance of deposit contracts emerges under corner preferences. It is shown that aggregate uncertainty creates high price...

The paper develops a banking framework where a welfare comparison is made between non-tradable demand deposit and equity contracts. Contrary to the existing literature that relies heavily on smooth preferences assumption to justify the liquidity insurance superiority of the ‘run-prone’ debt...