Correlated bank runs, interbank markets and reserve requirementsCarlos Cañón and Paula Margaretic Journal of Banking & Finance, 2014, vol. 49, issue C, 515-533 Abstract: This article extends the application of global games of Goldstein and Pauzner (2005) in the banking model of Diamond and Dybvig (1983) to account for correlation in the quality of banks’ long term investment, when banks are linked through cross deposits and there is a central bank. The goal is to study how these elements affect the deposit contract that banks offer to depositors and the ex ante probability of a bank run. We show that the coexistence of a central bank, which determines banks’ reserve requirements, and an interbank market, which redistributes reserves, leads to a smaller probability of a bank run and to fewer inefficient bank runs, relative to the case with no central bank and no interbank market. By adequately choosing the level of reserves to store, the central bank can improve the equilibrium outcome and allow banks to offer a higher interim payment to depositors, relative to the situation with no cross deposits. Keywords: Bank runs; Correlated investment; Interbank market (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:49:y:2014:i:c:p:515-533 DOI: 10.1016/j.jbankfin.2014.03.040 Access Statistics for this article Journal of Banking & Finance is currently edited by Ike Mathur More articles in Journal of Banking & Finance from Elsevier |
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