Journal of Banking & Finance Vol. 24 No. 4 2000
Avoiding bank runs in transition economies: The role of risk neutral capital
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.
- DOI
- 10.1016/s0378-4266(99)00083-7
- Volume
- 24
- Issue
- 4
- Pages
- 625-642
- Language
- en
- Sources
- crossref openalex bibtex:phds-export.bib