Financial Deepening and Bank Runs

Marie Hoerova

Working Papers from Cornell University, Center for Analytic Economics

Abstract: We analyze an economy with banks and markets and uncover implications of the presence of asset markets for the run-prone banking sector. Consumers can split their endowment between a market investment and a deposit contract which admits bank runs. Banks specialize in providing ex ante liquidity insurance. Market investment acts as insurance if there is a run. Banks provide a higher degree of the liquidity insurance while facing a lower probability of a run when compared to the banks-only economy. As long as consumers invest in both the market and the deposit contract, the welfare is higher when compared to the economy with banks, or markets, alone.

JEL-codes: E42 E44 G21 O16 (search for similar items in EconPapers)
Date: 2005-05
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Persistent link: https://EconPapers.repec.org/RePEc:ecl:corcae:05-07

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