Original Research

Is management of risk sharing by banks a cause for bank runs?

H. Abraham
South African Journal of Business Management | Vol 41, No 1 | a513 | DOI: https://doi.org/10.4102/sajbm.v41i1.513 | © 2018 H. Abraham | This work is licensed under CC Attribution 4.0
Submitted: 09 October 2018 | Published: 31 March 2010

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H. Abraham, School of Economics, University of Cape Town, South Africa

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Abstract

A bank, acting as a central planner under aggregate full certainty, optimizes liquidity allocation by sharing risk between discrete number of depositors. This paper demonstrates the following. (a) It is sufficient to rule out a bank run if all depositors inform the bank their types, patient or impatient, in advance, in a noncommittal manner. There cannot be a bank run because depositors’ strategic behaviour induces the bank to act as a central planner under aggregate full certainty. (b) The impossibility of a bank run is consistent with the price mechanism in partial equilibrium; but it may be inconsistent with the price mechanism in general disequilibrium. (c) The paper concludes that the management of risk sharing by banks is not a cause for bank runs.

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