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Commitment and equilibrium bank runs

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  • Huberto M. Ennis
  • Todd Keister

Abstract

We study the role of commitment in a version of the Diamond-Dybvig model with no aggregate uncertainty. As is well known, the banking authority can eliminate the possibility of a bank run by committing to suspend payments to depositors if a run were to start. We show, however, that in an environment without commitment, the banking authority will choose to only partially suspend payments during a run. In some cases, the reduction in early payouts under this partial suspension is insufficient to dissuade depositors from participating in the run. Bank runs can then occur with positive probability in equilibrium. The fraction of depositors participating in such a run is stochastic and can be arbitrarily close to one.

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Bibliographic Info

Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 274.

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Date of creation: 2007
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Handle: RePEc:fip:fednsr:274

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Keywords: Bank deposits ; Banks and banking; Central ; Financial crises;

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Citations

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Cited by:
  1. Fabrizio Mattesini & Cyril Monnet & Randall Wright, 2009. "Banking: a mechanism design approach," Working Papers 09-26, Federal Reserve Bank of Philadelphia.
  2. Peck, James & Shell, Karl, 2010. "Could making banks hold only liquid assets induce bank runs?," Journal of Monetary Economics, Elsevier, vol. 57(4), pages 420-427, May.
  3. Hoerova, Marie, 2007. "Run-prone banking and asset markets," Working Paper Series 0845, European Central Bank.
  4. Todd Keister & Huberto M. Ennis, 2008. "Run Equilibria in a Model of Financial Intermediation," 2008 Meeting Papers 513, Society for Economic Dynamics.
  5. Huberto M. Ennis & Todd Keister, 2009. "Bank Runs and Institutions: The Perils of Intervention," American Economic Review, American Economic Association, vol. 99(4), pages 1588-1607, September.

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