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Bank Runs: Speculative Runs and Fundamental Runs

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Authors
Oh, Seonghwan; Wrase, Jeffrey
Issue Date
1991
Publisher
Seoul Journal of Economics
Citation
Seoul Journal of Economics 4 (No. 3 1991): 199-214
Keywords
Diamond and Dybvig; DD model; restricting payments
Abstract
This paper analyzes deposit contracts when banks face alternative types of bank runs. The bank in our model can prevent speculative types of bank runs, which arise when depositors believe that deposit withdrawal volume will lead the bank into insolvency, by designing contracts that allow for payment suspension. However, suspension does not eliminate fundamental runs which arise when depositors calculate, given new information revealing low returns, that deposit withdrawal dominates deposit retention. The bank can eliminate fundamental runs by restricting payments. Then, deposit claim depreciation depends on expected returns and withdrawal volume prior to restriction.
ISSN
1225-0279
Language
English
URI
http://hdl.handle.net/10371/933
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College of Social Sciences (사회과학대학)Institute of Economics Research (경제연구소)Seoul Journal of EconomicsSeoul Journal of Economics vol.04(3) (Fall 1991)
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