Avoiding Bank Runs in Transition Economies: The Role of Risk Neutral Capital
Posted: 22 Sep 2000
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: 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
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