Bank runs and investment decisions revisited

Huberto Ennis and Todd Keister

No 04-03, Working Paper from Federal Reserve Bank of Richmond

Abstract: We examine how the possibility of a bank run affects the deposit contract offered and the investment decisions made by a competitive bank. Cooper and Ross (1998) have shown that when the probability of a run is small, the bank will offer a contract that admits a bank-run equilibrium. We show that, in this case, the bank will chose to hold an amount of liquid reserves exactly equal to what withdrawal demand will be if a run does not occur. In other words, precautionary or \"excess\" liquidity will not be held. This result allows us to determine how the possibility of a bank run affects the level of illiquid investment chosen by a bank. We show that when the cost of liquidating investment early is high, the level of investment is decreasing in the probability of a run. However, when liquidation costs are moderate, the level of investment is actually increasing in the probability of a run.

Date: 2004
New Economics Papers: this item is included in nep-dge
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.richmondfed.org/publications/research/working_papers/2004/wp_04-3.cfm (text/html)
https://www.richmondfed.org/-/media/RichmondFedOrg ... /2004/pdf/wp04-3.pdf Full text (application/pdf)

Related works:
Journal Article: Bank runs and investment decisions revisited (2006)
Working Paper: Bank Runs and Investment Decisions Revisited (2004)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedrwp:04-03

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Working Paper from Federal Reserve Bank of Richmond Contact information at EDIRC.
Bibliographic data for series maintained by Christian Pascasio ().