Commitment and equilibrium bank runs

Huberto M. Ennis () and Todd Keister ()

No 274, Staff Reports from Federal Reserve Bank of New York

Abstract: We study the role of commitment in a version of the Diamond-Dybvig model with no aggregate uncertainty. As is well known, the banking authority can eliminate the possibility of a bank run by committing to suspend payments to depositors if a run were to start. We show, however, that in an environment without commitment, the banking authority will choose to only partially suspend payments during a run. In some cases, the reduction in early payouts under this partial suspension is insufficient to dissuade depositors from participating in the run. Bank runs can then occur with positive probability in equilibrium. The fraction of depositors participating in such a run is stochastic and can be arbitrarily close to one.

Keywords: Bank deposits; Banks and banking, Central; Financial crises (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-fin and nep-ias
Date: Written 2007
View list of references View citations in EconPapers

Downloads: (external link)
http://www.newyorkfed.org/research/staff_reports/sr274.html (text/html)
http://www.newyorkfed.org/research/staff_reports/sr274.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Persistent link: http://EconPapers.repec.org/RePEc:fip:fednsr:274

Ordering information: This working paper can be ordered from
http://www.ny.frb.org/rmaghome/staff_rp/

Access Statistics for this paper

More papers in Staff Reports from Federal Reserve Bank of New York
Contact information at EDIRC.
Series data maintained by Diane Rosenberger ().