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Bank runs and self-insured bank deposits

Author

Listed:
  • Jarrow, Robert
  • Xu, Liheng

Abstract

This paper studies bank runs in an extended Diamond and Dybvig model. The model is extended in two ways. One, agents have heterogeneous wealth and two, banks can invest in both liquid and illiquid assets. We argue that the underlying reason for bank runs is ambiguous property rights. Sequential conversion is an example of such ambiguity. Demand deposit insurance eliminates this ambiguity. In this regard, we characterize conditions on the economy where banks can preclude bank runs as an equilibrium by self-insuring their deposits with an FDIC deposit insurance like contract.

Suggested Citation

  • Jarrow, Robert & Xu, Liheng, 2015. "Bank runs and self-insured bank deposits," The Quarterly Review of Economics and Finance, Elsevier, vol. 58(C), pages 180-189.
  • Handle: RePEc:eee:quaeco:v:58:y:2015:i:c:p:180-189
    DOI: 10.1016/j.qref.2015.02.006
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    References listed on IDEAS

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    More about this item

    Keywords

    Bank runs; Deposit insurance; Liquid and illiquid assets; Nash equilibrium;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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