Sequential Equilibrium and Competition in a Diamond–Dybvig Banking Model

Banking Instability and Deposit Insurance: The Role of Moral Hazard

“…Among the earliest are Fischer (1911) and Bryant (1980), who hold that a bank run occurs when the value of the bank's total assets falls short of its holdings of deposits, which incites depositors to rush and quickly withdraw their deposits in order to cut on losses. Diamond and Dybvig (1983) have also argued that a bank run is caused by a shift in expectations, which could depend on almost anything (referred to as sunspots run equilibrium) (see Diamond and Dybvig, 1983;Adao and Temzelides, 1998;Carmona, 2004). In yet another explanation, Chari and Jagannathan (1988) maintain that a bank run can occur even if no one has any adverse information about future returns of the bank.…”

Bank failures caused by Large withdrawals: An explanation based purely on liquidity

“…10 In period 1 each consumer learns her type and then chooses either to withdraw from the bank or to wait, depending on her type, on the interest rate and on her deposit choice. Consumers who withdraw their deposit in period 1 can either consume the goods received or store 9 Adão and Temzelides [1] have shown in a similar framework that another type of bank's behavior is possible in equilibrium; however, bank's maximization of the ex-ante utility of the consumers is the only behavior plausible in more refined notions of equilibrium. 10 In fact, our results extend to the case where consumers are allowed to deposit just a fraction of their endowment.…”

“…Consumers, who are all alike ex-ante, can be of two distinct types: impatient consumers, who need to consume early, and patient consumers, willing to postpone consumption. 1 In contrast to those authors, we assume that there is a finite number of consumers, although this number will increase to infinity. We assume that there is aggregate uncertainty, modeled in the following way: first, the probability of each consumer being impatient is chosen according to a continuous density function; then, the consumers' type is determined in an i.i.d.…”

Financial Intermediation and Deposit Contracts: A Strategic View

“…The model offers a rationale for the existence of financial intermediaries into the economic system: the intermediaries are able to provide liquidity services to consumers in the presence of an otherwise uninsurable event 1 . At the same time it raises a link between the use of deposit contracts, one of the instruments an intermediary can rely on to provide liquidity insurance, and the fragility of the financial system.…”

“…The purpose of Adao and Temzelides (1998) is: first to explicitly model the deposit decision of consumers; and second to investigate in which bank to deposit when there are two identical banks that offer different demand deposit contracts. With respect to the first issue, the authors consider the presence of a unique bank in the economy, this bank offers a deposit contract through which the 2 In the same economy, competition through menus of exclusive contracts leads to inexistence issues while when an equilibrium exists the seller trades different quantities according to the quality of his good, in line with the results obtained in Rothschild and Stiglitz (1976).…”