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Enriching information to prevent bank runs

Author

Listed:
  • R. de O. Cavalcanti

    () (Escola Brasileira de Economia e Finanças, FGV/EPGE)

  • P. K. Monteiro

    () (Escola Brasileira de Economia e Finanças, FGV/EPGE)

Abstract

Abstract Basic thinking about bank failure has changed considerably in the last 50 years, from interpreting suspensions of payments as inefficient responses in a system lacking integration to advocating deposit-insurance arrangements triggered after funds are depleted. Modern banking theory, after Diamond and Dybvig (J Polit Econ 91:401–419, 1983) and Wallace (Fed Reserve Bank Minneap Q Rev 12(4):3–16, 1988), indicates that despite risk aversion, banks are under pressure and led to offer volatile returns exposed to coordination failure in the form of runs. In this paper, we recover a role for suspensions based on early acquisition of information about opportunistic behavior.

Suggested Citation

  • R. de O. Cavalcanti & P. K. Monteiro, 2016. "Enriching information to prevent bank runs," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 62(3), pages 477-494, August.
  • Handle: RePEc:spr:joecth:v:62:y:2016:i:3:d:10.1007_s00199-015-0907-6
    DOI: 10.1007/s00199-015-0907-6
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Andolfatto, David & Nosal, Ed & Sultanum, Bruno, 2014. "Preventing bank runs," Working Papers 2014-21, Federal Reserve Bank of St. Louis.
    2. repec:eee:jetheo:v:177:y:2018:i:c:p:616-658 is not listed on IDEAS
    3. J. D. P. Bertolai & R. de O. Cavalcanti, 2011. "High interest rates: the golden rule for bank stability in the Diamond-Dybvig model," Working Papers 14-2011, Universidade de São Paulo, Faculdade de Economia, Administração e Contabilidade de Ribeirão Preto.
    4. 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.
    5. Sultanum, Bruno, 2018. "Financial fragility and over-the-counter markets," Journal of Economic Theory, Elsevier, vol. 177(C), pages 616-658.
    6. Haltom, Renee Courtois & Sultanum, Bruno, 2018. "Preventing Bank Runs," Richmond Fed Economic Brief, Federal Reserve Bank of Richmond, issue March, pages 1-6.
    7. repec:eee:ecanpo:v:58:y:2018:i:c:p:121-130 is not listed on IDEAS
    8. Cavalcanti, Ricardo de Oliveira & Bertolai, Jefferson Donizeti Pereira & Monteiro, P. K., 2011. "A note on convergence of Peck-Shell and Green-Lin mechanisms in the Diamond-Dybvig model," FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) 722, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil).

    More about this item

    Keywords

    Diamond–Dybvig model; Sequential service; Bank runs;

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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