Bank runs with many small banks and mutual guarantees at the terminal stage

In this paper, we develop a model in the spirit of Diamond and Dybvig (J Polit Econ 91(3):401-419, 1983), with bank-specific sequential-service constraints and commitment to a redistribution policy at the terminal date. In the good equilibrium, some insurance is provided against the risk of being af...

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Bibliographic Details
Published in:Economic theory 2019-07, Vol.68 (1), p.125-176
Main Authors: Bertolai, J. D. P., de O. Cavalcanti, R., Monteiro, P. K.
Format: Article
Language:English
Subjects:
Arithmetic
Bank runs
Banking industry
Banks
Community banks
Consumption
Deposit insurance
Economic theory
Economic Theory/Quantitative Economics/Mathematical Methods
Economics
Economics and Finance
Equilibrium
Game Theory
Guarantees
Insurance
Microeconomics
Public Finance
Redistribution
Research Article
Risk sharing
Savings
Social and Behav. Sciences
Sovereign debt
Unpleasant
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Summary:In this paper, we develop a model in the spirit of Diamond and Dybvig (J Polit Econ 91(3):401-419, 1983), with bank-specific sequential-service constraints and commitment to a redistribution policy at the terminal date. In the good equilibrium, some insurance is provided against the risk of being affiliated with a bank with too many impatient depositors. We also find, however, that an unpleasant arithmetic takes place in a bad equilibrium, with patient depositors realizing they can be heavily taxed since runs are reducing savings in other banks, which in turn changes the ability of their own bank to induce truth-telling. We prove that even the disclosure device proposed by Green and Lin (J Econ Theory 109(1):1-23, 2003) may not remove bank-run equilibria.
ISSN:0938-2259
1432-0479
DOI:10.1007/s00199-018-1117-9