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How Noisy Should a Noisy Signal be: A Model of Bank Runs

  • Geethanjali Selvaretnam

    ()

In the literature on bank runs where depositors decide whether to withdraw early from the bank or not based on the noisy signals they receive about the future returns, a unique equilibrium is established with a threshold level below which depositor would withdraw. However, these papers assume precise information. In reality noise levels need not be very small. The information that is available to the depositors can be endogenised. This paper finds that to either minimise the probability of a bank-run or maximise the expected utility of the depositors, there should be high transparency of the banks' long term returns.

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Paper provided by University of Essex, Department of Economics in its series Economics Discussion Papers with number 606.

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Date of creation: 09 Jan 2006
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Handle: RePEc:esx:essedp:606
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  1. Morris, Stephen & Shin, Hyun Song, 1997. "Unique Equilibrium in a Model of Self-fulfilling Currency Attacks," CEPR Discussion Papers 1687, C.E.P.R. Discussion Papers.
  2. Nier, Erlend W., 2005. "Bank stability and transparency," Journal of Financial Stability, Elsevier, vol. 1(3), pages 342-354, April.
  3. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June.
  4. Zhu, Haibin, 2005. "Bank runs, welfare and policy implications," Journal of Financial Stability, Elsevier, vol. 1(3), pages 279-307, April.
  5. Carlsson, H. & Van Damme, E., 1990. "Global Games And Equilibrium Selection," Papers 9052, Tilburg - Center for Economic Research.
  6. Itay Goldstein & Ady Pauzner, 2005. "Demand-Deposit Contracts and the Probability of Bank Runs," Journal of Finance, American Finance Association, vol. 60(3), pages 1293-1327, 06.
  7. Stephen Morris & Hyun Song Shin, 2000. "Global Games: Theory and Applications," Cowles Foundation Discussion Papers 1275R, Cowles Foundation for Research in Economics, Yale University, revised Aug 2001.
  8. Heinemann, Frank & Illing, Gerhard, 2002. "Speculative attacks: Unique equilibrium and transparency," Munich Reprints in Economics 19430, University of Munich, Department of Economics.
  9. repec:ner:tilbur:urn:nbn:nl:ui:12-154416 is not listed on IDEAS
  10. Russell Cooper & Thomas W. Ross, 2002. "Bank Runs: Deposit Insurance and Capital Requirements," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(1), pages 55-72, February.
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