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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

Suggested Citation

  • 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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    References listed on IDEAS

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    1. Andolfatto, David & Nosal, Ed & Wallace, Neil, 2007. "The role of independence in the Green-Lin Diamond-Dybvig model," Journal of Economic Theory, Elsevier, vol. 137(1), pages 709-715, November.
    2. Hellwig, Martin, 1994. "Liquidity provision, banking, and the allocation of interest rate risk," European Economic Review, Elsevier, vol. 38(7), pages 1363-1389, August.
    3. Postlewaite, Andrew & Vives, Xavier, 1987. "Bank Runs as an Equilibrium Phenomenon," Journal of Political Economy, University of Chicago Press, vol. 95(3), pages 485-491, June.
    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.
    5. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 24(Win), pages 14-23.
    6. James Peck & Karl Shell, 2003. "Bank Portfolio Restrictions and Equilibrium Bank Runs," Levine's Bibliography 666156000000000077, UCLA Department of Economics.
    7. James Peck & Karl Shell, 2003. "Equilibrium Bank Runs," Journal of Political Economy, University of Chicago Press, vol. 111(1), pages 103-123, February.
    8. 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.
    9. Bryant, John, 1980. "A model of reserves, bank runs, and deposit insurance," Journal of Banking & Finance, Elsevier, vol. 4(4), pages 335-344, December.
    10. 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.
    11. Neil Wallace, 1988. "Another attempt to explain an illiquid banking system: the Diamond and Dybvig model with sequential service taken seriously," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 12(Fall), pages 3-16.
    12. 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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    Cited by:

    1. Li, Yang, 2017. "Interest rates and financial fragility," Journal of Economic Dynamics and Control, Elsevier, vol. 82(C), pages 195-205.
    2. 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.
    3. 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.
    4. Gao, Jiahong & Reed, Robert R., 2024. "Increasing returns to scale and financial fragility," Journal of Mathematical Economics, Elsevier, vol. 111(C).
    5. Voellmy, Lukas, 2024. "Preventing runs under sequential revelation of liquidity needs," Journal of Economic Dynamics and Control, Elsevier, vol. 158(C).
    6. 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.
    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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