Enriching information to prevent bank runs

Ricardo Cavalcanti and Paulo Monteiro

Economic Theory, 2016, vol. 62, issue 3, No 3, 477-494

Abstract: Abstract Basic thinking about bank failure has changed considerably in the last 50 years, from interpreting suspensions of payments as inefficient responses in a system lacking integration to advocating deposit-insurance arrangements triggered after funds are depleted. Modern banking theory, after Diamond and Dybvig (J Polit Econ 91:401–419, 1983) and Wallace (Fed Reserve Bank Minneap Q Rev 12(4):3–16, 1988), indicates that despite risk aversion, banks are under pressure and led to offer volatile returns exposed to coordination failure in the form of runs. In this paper, we recover a role for suspensions based on early acquisition of information about opportunistic behavior.

Keywords: Diamond–Dybvig model; Sequential service; Bank runs (search for similar items in EconPapers)
JEL-codes: E4 E5 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (13)

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Working Paper: Enriching information to prevent bank runs (2011)
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DOI: 10.1007/s00199-015-0907-6

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