Bank Runs: Speculative Runs and Fundamental Runs

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.