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

Author

Listed:
  • J. D. P. Bertolai

    (USP/FEARP)

  • R. de O. Cavalcanti

    (FGV EPGE)

  • P. K. Monteiro

    (FGV EPGE)

Abstract

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.

Suggested Citation

  • 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.
    • Handle: RePEc:spr:joecth:v:68:y:2019:i:1:d:10.1007_s00199-018-1117-9
    DOI: 10.1007/s00199-018-1117-9
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    References listed on IDEAS

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    Cited by:

    1. Parnes, Dror, 2021. "Modeling the contagion of bank runs with a Markov model," The Quarterly Review of Economics and Finance, Elsevier, vol. 81(C), pages 174-187.
    2. 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.

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    More about this item

    Keywords

    Sequential service; Deposit insurance; Green–Lin model;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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