Avoiding Bank Runs in Transition Economies: The Role of Risk Neutral Capital

Posted: 22 Sep 2000

See all articles by Shubhashis Gangopadhyay

Shubhashis Gangopadhyay

India Development Foundation; University of Gothenburg; University of Groningen, Faculty of Economics and Business, Students; Indian School of Public Policy

Gurbachan Singh

Jawaharlal Nehru University

Abstract

In a general equilibrium model with risk neutral and risk averse agents, we show that if banks issue both demand deposits and equity, then free banking is run-proof and efficient. In particular, we obtain the first best insurance solution if there is adequate risk neutral capital. If sufficient risk neutral capital is unavailable, then a partial suspension of convertibility is optimal. In general, therefore, policies like capital adequacy norms and deposit insurance are neither necessary nor desirable.

Keywords: Bank runs, capital adequacy, suspension of convertibility

JEL Classification: G28, G21

Suggested Citation

Gangopadhyay, Shubhashis and Singh, Gurbachan, Avoiding Bank Runs in Transition Economies: The Role of Risk Neutral Capital. Available at SSRN: https://ssrn.com/abstract=238905

Shubhashis Gangopadhyay (Contact Author)

India Development Foundation ( email )

4101 DLF Phase IV
Gurugram, Haryana 122002
India
+91 9910991221 (Phone)

University of Gothenburg

Gothenburg
Sweden

University of Groningen, Faculty of Economics and Business, Students

Postbus 72
9700 AB Groningen
Netherlands

Indian School of Public Policy

Delhi
India

Gurbachan Singh

Jawaharlal Nehru University ( email )

Vasant Vihar
Jawaharlal Nehru University
New Delhi, DE Delhi
India

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