Gates, Fees, and Preemptive Runs

Marco Cipriani, Antoine Martin, Patrick E. McCabe and Bruno Parigi
Additional contact information
Patrick E. McCabe: https://www.federalreserve.gov/econres/patrick-e-mccabe.htm

No 2014-30, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We build a model of a financial intermediary, in the tradition of Diamond and Dybvig (1983), and show that allowing the intermediary to impose redemption fees or gates in a crisis--a form of suspension of convertibility--can lead to preemptive runs. In our model, a fraction of investors (depositors) can become informed about a shock to the return of the intermediary's assets. Later, the informed investors learn the realization of the shock and can choose their redemption behavior based on this information. We prove two results: First, there are situations in which informed investors would wait until the uncertainty is resolved before redeeming if redemption fees or gates cannot be imposed, but those same investors would redeem preemptively, if fees or gates are possible. Second, we show that for the intermediary, which maximizes expected utility of only its own investors, imposing gates or fees can be ex post optimal. These results have important policy implications for intermediaries that are vulnerable to runs, such as money market funds, because the preemptive runs that can be caused by the possibility of gates or fees may have damaging negative externalities.

Keywords: Banks; money market funds; runs; preemptive runs; gates; fees (search for similar items in EconPapers)
Pages: 18 pages
Date: 2014-04-03
New Economics Papers: this item is included in nep-ban and nep-cta
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Related works:
Working Paper: Gates, Fees, and Preemptive Runs (2014)
Working Paper: Gates, fees, and preemptive runs (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2014-30

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