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Optimal financial crises: A note on Allen and Gale

Author

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  • François Marini

    (Université Paris-Dauphine, Place du Maréchal de Lattre de Tassigny, 75775 Paris, Cedex 16, France, e-mail: Francois.Marini@dauphine.fr)

Abstract

This note provides an example of an optimal banking panic. We construct a model in which a banking panic is triggered by the banker, not the depositors. When the banker receives a pessimistic information on the return on the bank's assets, he liquidates them prematurely in order to protect his capital. In the face of this liquidation, all depositors withdraw their funds prematurely. The premature liquidation of the bank's assets strengthens the bank's balance sheet. As a result, the banking panic does not cause bank failure and the government should not try to prevent the panic. Such a panic occured in 1857 in the United States. The Geneva Risk and Insurance Review (2006) 31, 61–66. doi:10.1007/s10713-006-9468-8

Suggested Citation

  • François Marini, 2006. "Optimal financial crises: A note on Allen and Gale," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 31(1), pages 61-66, July.
    • Handle: RePEc:pal:genrir:v:31:y:2006:i:1:p:61-66
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