Run theorems for low returns and large banks

Jefferson Bertolai (), Ricardo Cavalcanti and Paulo Monteiro

Economic Theory, 2014, vol. 57, issue 2, 223-252

Abstract: In this paper, we revisit the issue of bank fragility in the Diamond and Dybvig (J Polit Econ 91:401–419, 1983 ) model with sequential service and finite traders. We provide a precise condition under which banks are susceptible to a run when the return on investment is low, and we show that sufficiently large banks are always susceptible to a run. One interpretation of the condition is that exposure to runs occurs when desire for consumption smoothing or predictability of preference profiles are relatively high. Copyright Springer-Verlag Berlin Heidelberg 2014

Keywords: Low-return runs; Large-bank runs; Run-indicator algorithm; E4; E5 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (9)

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DOI: 10.1007/s00199-014-0824-0

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