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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

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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    Cited by:

    1. David Andolfatto & Ed Nosal & Bruno Sultanum, 2014. "Preventing bank runs," Working Papers 2014-21, Federal Reserve Bank of St. Louis.
    2. Jiahong Gao & Robert R. Reed, 2023. "Preventing bank panics: The role of the regulator's preferences," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 56(2), pages 387-422, May.
    3. Huberto Ennis & Todd Keister, 2016. "Optimal banking contracts and financial fragility," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 61(2), pages 335-363, February.
    4. Lukas Altermatt & Hugo van Buggenum & Dr. Lukas Voellmy, 2022. "Systemic bank runs without aggregate risk: how a misallocation of liquidity may trigger a solvency crisis," Working Papers 2022-10, Swiss National Bank.
    5. Sultanum, Bruno, 2018. "Financial fragility and over-the-counter markets," Journal of Economic Theory, Elsevier, vol. 177(C), pages 616-658.
    6. Renee Courtois Haltom & Bruno Sultanum, 2018. "Preventing Bank Runs," Richmond Fed Economic Brief, Federal Reserve Bank of Richmond, issue March.
    7. Gu, Chao & Monnet, Cyril & Nosal, Ed & Wright, Randall, 2023. "Diamond–Dybvig and beyond: On the instability of banking," European Economic Review, Elsevier, vol. 154(C).
    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).
    9. J. D. P. Bertolai & R. de O. Cavalcanti & P. K. Monteiro, 2019. "Bank runs with many small banks and mutual guarantees at the terminal stage," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 68(1), pages 125-176, July.
    10. 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.
    11. Parnes, Dror, 2021. "Modeling the contagion of bank runs with a Markov model," The Quarterly Review of Economics and Finance, Elsevier, vol. 81(C), pages 174-187.
    12. 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.
    13. Unger, Elizabeth A. & Ulfarsson, Gudmundur F. & Gardarsson, Sigurdur M. & Matthiasson, Thorolfur, 2018. "The effect of wind energy production on cross-border electricity pricing: The case of western Denmark in the Nord Pool market," Economic Analysis and Policy, Elsevier, vol. 58(C), pages 121-130.
    14. Routledge, Bryan & Zetlin-Jones, Ariel, 2022. "Currency stability using blockchain technology," Journal of Economic Dynamics and Control, Elsevier, vol. 142(C).
    15. Markus Kinateder & Hubert Janos Kiss & Agnes Pinter, 2015. "Would depositors like to show others that they do not withdraw? Theory and Experiment," CERS-IE WORKING PAPERS 1553, Institute of Economics, Centre for Economic and Regional Studies.
    16. Huang, Xuesong, 2024. "Sophisticated banking contracts and fragility when withdrawal information is public," Theoretical Economics, Econometric Society, vol. 19(1), January.
    17. James Peck & Abolfazi Setayesh, 2023. "Bank Runs and the Optimality of Limited Banking," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 47, pages 100-110, January.

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    More about this item

    Keywords

    Diamond–Dybvig model; Sequential service; Bank runs;
    All these keywords.

    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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