Bank runs, suspension of convertibility versus deposit insurance

Margarita Samartín

DEE - Working Papers. Business Economics. WB from Universidad Carlos III de Madrid. Departamento de Economía de la Empresa

Abstract: This paper models information-induced and "pure-panic" runs in the banking system, in an environment of risk-averse agents. In this framework, deposits are needed to provide insurance against investors' unexpected demand for liquidity and therefore, a role for a financial intermediary is justified. Conditions to assure bank-runs as an equilibrium phenomenon are derived, and a welfare analysis of two devices that have traditionally been used by banks in order to prevent runs (namely, suspension of convertibility versus deposit insurance), is presented. The analysis shown in this paper finds support for the "narrow banking" proposal that has been currently discussed in the literature.

Keywords: Banking; Deposit; contracts; Deposit; insurance; Suspension; of; convertibility (search for similar items in EconPapers)
Date: 1998-12
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Persistent link: https://EconPapers.repec.org/RePEc:cte:wbrepe:6529

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