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Bank runs, suspension of convertibility versus deposit insurance

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  • Samartín, Margarita

Abstract

This paper models information-induced and "pure-panic" runs in the banking system, in an environment of risk-averse agents. In this framework, deposits are needed to provide insurance against investors' unexpected demand for liquidity and therefore, a role for a financial intermediary is justified. Conditions to assure bank-runs as an equilibrium phenomenon are derived, and a welfare analysis of two devices that have traditionally been used by banks in order to prevent runs (namely, suspension of convertibility versus deposit insurance), is presented. The analysis shown in this paper finds support for the "narrow banking" proposal that has been currently discussed in the literature.

Suggested Citation

  • Samartín, Margarita, 1998. "Bank runs, suspension of convertibility versus deposit insurance," DEE - Working Papers. Business Economics. WB 6529, Universidad Carlos III de Madrid. Departamento de Economía de la Empresa.
    • Handle: RePEc:cte:wbrepe:6529
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    References listed on IDEAS

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    1. Bryant, John, 1980. "A model of reserves, bank runs, and deposit insurance," Journal of Banking & Finance, Elsevier, vol. 4(4), pages 335-344, December.
    2. Bhattacharya, Sudipto, 1982. "Aspects of Monetary and Banking Theory and Moral Hazard," Journal of Finance, American Finance Association, vol. 37(2), pages 371-384, May.
    3. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 84(3), pages 488-500.
    4. Jacklin, Charles J & Bhattacharya, Sudipto, 1988. "Distinguishing Panics and Information-Based Bank Runs: Welfare and Policy Implications," Journal of Political Economy, University of Chicago Press, vol. 96(3), pages 568-592, June.
    5. repec:bla:jfinan:v:43:y:1988:i:3:p:749-61 is not listed on IDEAS
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