Commitment and Equilibrium Bank Runs

41 Pages Posted: 14 Feb 2007 Last revised: 10 Jun 2010

See all articles by Huberto M. Ennis

Huberto M. Ennis

Federal Reserve Banks - Federal Reserve Bank of Richmond

Todd Keister

Rutgers, The State University of New Jersey - Department of Economics

Date Written: May 1, 2007

Abstract

We study the role of commitment in a version of the Diamond-Dybvig model with no aggregate uncertainty. As is well known, the banking authority can eliminate the possibility of a bank run by committing to suspend payments to depositors if a run were to start. We show, however, that in an environment without commitment, the banking authority will choose to only partially suspend payments during a run. In some cases, the reduction in early payouts under this partial suspension is insufficient to dissuade depositors from participating in the run. Bank runs can then occur with positive probability in equilibrium. The fraction of depositors participating in such a run is stochastic and can be arbitrarily close to one.

Keywords: banking panics, suspension of convertibility, time consistency

JEL Classification: G21, E61, G28

Suggested Citation

Ennis, Huberto M. and Keister, Todd, Commitment and Equilibrium Bank Runs (May 1, 2007). FRB of New York Staff Report No. 274. Available at SSRN: https://ssrn.com/abstract=962714 or http://dx.doi.org/10.2139/ssrn.962714

Huberto M. Ennis

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

Todd Keister (Contact Author)

Rutgers, The State University of New Jersey - Department of Economics ( email )

75 Hamilton Street
New Brunswick, NJ 08901
United States

HOME PAGE: http://econweb.rutgers.edu/tkeister

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