TAILIEUCHUNG - Bank Runs, Deposit Insurance, and Liquidity

The only impact evaluations the IDB has are beneficiary evaluations; that is, the IDB asks the beneficiaries in the communities how they evalu- ate what they received: Was it working correctly? Did they like it? Was the choice an adequate one? Was the project sustainable? The IDB study summarized about 800 project visits in various countries in which this sort of beneficiary evaluation was done, and in general, the beneficiary evaluations are quite positive. School projects have the highest evalua- tions even if a few schools that were built are not operating. Beneficia- ries give health posts a high priority, but there are problems in many areas with staffing. | Federal Reserve Bank of Minneapolis Quarterly Review Vol. 24 No. 1 Winter 2000 pp. 14-23 Bank Runs Deposit Insurance and Liquidity Douglas W. Diamond Theodore O. Yntema Professor of Finance Graduate School of Business University of Chicago Philip H. Dybvig Boatmen s Bancshares Professor of Banking and Finance John M. Olin School of Business Washington University in St. Louis Abstract This article develops a model which shows that bank deposit contracts can provide allocations superior to those of exchange markets offering an explanation of how banks subject to runs can attract deposits. Investors face privately observed risks which lead to a demand for liquidity. Traditional demand deposit contracts which provide liquidity have multiple equilibria one of which is a bank run. Bank runs in the model cause real economic damage rather than simply reflecting other problems. Contracts which can prevent runs are studied and the analysis shows that there are circumstances when government provision of deposit insurance can produce superior contracts. This article is reprinted from the Journal of Political Economy June 1983 vol. 91 no. 3 pp. 401-19 with the permission of the University of Chicago Press. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System. This article develops a model which shows that bank deposit contracts can provide allocations superior to those of exchange markets offering an explanation of how banks subject to runs can attract deposits. Investors face privately observed risks which lead to a demand for liquidity. Traditional demand deposit contracts which provide liquidity have multiple equilibria one of which is a bank run. Bank runs in the model cause real economic damage rather than simply reflecting other problems. Contracts which can prevent runs are studied and the analysis shows that there are circumstances when government provision of deposit .