Bank Runs: A Microeconomic Analysis

H Abraham

Studies in Economics and Econometrics, 2008, vol. 32, issue 3, 21-27

Abstract: In this paper bank equilibrium is, (a) deposit allocation deemed by customers as indexed by pure extrinsic events; and (b) beliefs of customers who choose to keep their deposits in long term maturity are self-fulfilling. The paper shows that, in an economy with a single commodity, beside any bank equilibrium there exists a bank run equilibrium. The bank run equilibrium is caused by panic resulting from non-appearance of the expected extrinsic event. When the bank acts only as an intermediary to facilitate market equilibrium, then depositors’ allocations may be suboptimal but the bank ceases to be susceptible to runs.

Date: 2008
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DOI: 10.1080/10800379.2008.12106454

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