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Run theorems for low returns and large banks

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Abstract

In this paper, we revisit the issue of bank fragility in the Diamond and Dybvig (J Polit Econ 91:401–419, 1983 ) model with sequential service and finite traders. We provide a precise condition under which banks are susceptible to a run when the return on investment is low, and we show that sufficiently large banks are always susceptible to a run. One interpretation of the condition is that exposure to runs occurs when desire for consumption smoothing or predictability of preference profiles are relatively high. Copyright Springer-Verlag Berlin Heidelberg 2014

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  • Jefferson Bertolai & Ricardo Cavalcanti & Paulo Monteiro, 2014. "Run theorems for low returns and large banks," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 57(2), pages 223-252, October.
    • Handle: RePEc:spr:joecth:v:57:y:2014:i:2:p:223-252
    DOI: 10.1007/s00199-014-0824-0
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    4. Ennis, Huberto M. & Keister, Todd, 2009. "Run equilibria in the Green-Lin model of financial intermediation," Journal of Economic Theory, Elsevier, vol. 144(5), pages 1996-2020, September.
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    6. Ted Temzelides & Bernandino Adao, 1995. "Beliefs, Competition, and Bank Runs," Finance 9511001, University Library of Munich, Germany.
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    9. Edward J. Green & Ping Lin, 2000. "Diamond and Dybvig's classic theory of financial intermediation : what's missing?," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 24(Win), pages 3-13.
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    12. Bernardino Adao & Ted Temzelides, 1998. "Sequential Equilibrium and Competition in a Diamond-Dybvig Banking Model," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(4), pages 859-877, October.
    13. Ricardo O. Cavalcanti, 2004. "A monetary mechanism for sharing capital: Diamond and Dybvig meet Kiyotaki and Wright," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 24(4), pages 769-788, November.
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    1. R. de O. Cavalcanti & P. K. Monteiro, 2016. "Enriching information to prevent bank runs," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 62(3), pages 477-494, August.
    2. Huberto Ennis & Todd Keister, 2016. "Optimal banking contracts and financial fragility," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 61(2), pages 335-363, February.
    3. Gao, Jiahong & Reed, Robert R., 2024. "Increasing returns to scale and financial fragility," Journal of Mathematical Economics, Elsevier, vol. 111(C).
    4. Li, Yang, 2017. "Interest rates and financial fragility," Journal of Economic Dynamics and Control, Elsevier, vol. 82(C), pages 195-205.
    5. Bertolai, Jefferson Donizeti Pereira & de Melo, Matheus Anthony, 2017. "Fragilidade bancária com (e sem) serviço sequencial," Revista Brasileira de Economia - RBE, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil), vol. 71(3), September.
    6. Voellmy, Lukas, 2024. "Preventing runs under sequential revelation of liquidity needs," Journal of Economic Dynamics and Control, Elsevier, vol. 158(C).
    7. J. D. P. Bertolai & R. de O. Cavalcanti & P. K. Monteiro, 2019. "Bank runs with many small banks and mutual guarantees at the terminal stage," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 68(1), pages 125-176, July.

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    More about this item

    Keywords

    Low-return runs; Large-bank runs; Run-indicator algorithm; E4; E5;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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