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Commitment and Equilibrium Bank Runs

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  • Todd Keister

    (Federal Reserve Bank of New York)

  • Huberto M. Ennis

    (Federal Reserve Bank of Richmond)

Abstract

We study the role of commitment in a version of the Diamond and Dybvig (JPE, 1983) 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 convince depositors to not participate 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.

Suggested Citation

  • Todd Keister & Huberto M. Ennis, 2007. "Commitment and Equilibrium Bank Runs," 2007 Meeting Papers 509, Society for Economic Dynamics.
    • Handle: RePEc:red:sed007:509
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    Cited by:

    1. 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.
    2. Ennis, Huberto M. & Keister, Todd, 2009. "Run equilibria in the Green-Lin model of financial intermediation," Journal of Economic Theory, Elsevier, vol. 144(5), pages 1996-2020, September.
    3. Huberto M. Ennis & Todd Keister, 2008. "Run equilibria in a model of financial intermediation," Staff Reports 312, Federal Reserve Bank of New York.
    4. Randall Wright & Cyril Monnet & Fabrizio Mattesini, 2009. "Banking: a mechanism design approach," 2009 Meeting Papers 635, Society for Economic Dynamics.
    5. Francesca Carapella, 2015. "Banking panics and deflation in dynamic general equilibrium," Finance and Economics Discussion Series 2015-18, Board of Governors of the Federal Reserve System (U.S.).
    6. Hoerova, Marie, 2007. "Run-prone banking and asset markets," Working Paper Series 845, European Central Bank.

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