Optimal Banking Contracts and Financial Fragility

@inproceedings{Ennis2014OptimalBC,
  title={Optimal Banking Contracts and Financial Fragility},
  author={Huberto M. Ennis and Todd Keister},
  year={2014}
}
We study a finite-depositor version of the Diamond-Dybvig model of financial intermediation in which the bank and all depositors observe withdrawals as they occur. We derive the constrained efficient allocation of resources in closed form and show that this allocation provides liquidity insurance to depositors. The contractual arrangement that decentralizes this allocation resembles a standard bank deposit in that it has a demandable debt-like structure. When withdrawals are unusually high… CONTINUE READING

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