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Could making banks hold only liquid assets induce bank runs? |
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| Authors: | James Peck Karl Shell |
| Institution: | a Department of Economics, The Ohio State University, 440 Arps Hall, Columbus, OH 43210-1172, USA b Department of Economics, Cornell University, USA |
| Abstract: | Restrictions placed on bank portfolios are analyzed in a banking model designed to capture the role of checking accounts in facilitating transactions. Forcing banks to hold only liquid assets creates the incentive for liquidity-based runs. Even when a run does not occur, welfare is reduced as a result of overinvestment in the liquid asset. |
| Keywords: | Bank runs Bank stability Deposit contracts Glass-Steagall banking Mechanism design Portfolio restrictions Sunspot equilibrium |
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