To make high-quality research more accessible and easier to explore.

Fields:

Avoiding bank runs in transition economies: The role of risk neutral capital

Journal of Banking & Finance 2000 24(4), 625-642
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.