Bank Runs, Deposit Insurance, and Liquidity.¶
Diamond, D. W., & Dybvig, P. H. (1983). Bank Runs, Deposit Insurance, and Liquidity. Journal of Political Economy, 91(3), 401-419.
Cited by¶
13 citations across 13 artifacts.
Each citation links to the sentence it supports in the citing article.
Primes¶
- Boundary Signal Spillover
- In banking, an announced bailout for one institution is received by depositors and creditors of similar institutions who act on their own risk calculus, so a target-scoped rescue becomes an industry-wide stability problem.
This sourceFormalizes how depositors' self-fulfilling expectations can produce runs; the canonical model underpinning contagion of run risk from one institution to similar institutions.
Supported in partVerified against the publisher's abstract
Supplies the self-fulfilling bank-run equilibrium in which depositors act on their own expectations alone, but says nothing about a bailout announced for one bank spilling over to similarly placed institutions.
“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.”
- In banking, an announced bailout for one institution is received by depositors and creditors of similar institutions who act on their own risk calculus, so a target-scoped rescue becomes an industry-wide stability problem.
- Caldera Collapse
- Bank runs: depositors progressively withdraw the liquidity that supports the operating model; the balance sheet's composition is unchanged, but the liquid support beneath it has been evacuated, and below a threshold the bank collapses suddenly — not from a new loss, but from the unsupportability of its existing position.
This sourceFoundational model of bank runs as withdrawal of liquid support precipitating sudden collapse of an otherwise unchanged balance sheet.
Supported in partVerified against the publisher's abstract
Diamond & Dybvig's own abstract supplies the run-as-equilibrium and run-causes-real-damage half of the claim, but not the withdrawal mechanics, the unchanged balance sheet, or the threshold.
“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.”
- Bank runs: depositors progressively withdraw the liquidity that supports the operating model; the balance sheet's composition is unchanged, but the liquid support beneath it has been evacuated, and below a threshold the bank collapses suddenly — not from a new loss, but from the unsupportability of its existing position.
- Liquidity
- Conflating the two produces both diagnostic and policy errors: policymakers may provide insufficient support to illiquid-but-solvent institutions, or prop up insolvent ones masquerading as merely illiquid—precisely the dynamic Diamond and Dybvig (1983) modeled when they showed that demand-deposit contracts make banks vulnerable to self-fulfilling runs even when underlying assets remain sound, motivating deposit insurance and lender-of-last-resort facilities as remedies for liquidity—not solvency—failure.
This sourceCanonical model showing that demand-deposit contracts create maturity-transformation services but expose banks to self-fulfilling runs even when underlying assets are fundamentally sound; establishes deposit insurance and lender-of-last-resort facilities as remedies for liquidity—not solvency—failure.
Supported in partVerified against the publisher's abstract
Abstract backs self-fulfilling runs (multiple equilibria) and deposit insurance as remedy, but not the sound-asset premise or lender-of-last-resort.
“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.”
- Conflating the two produces both diagnostic and policy errors: policymakers may provide insufficient support to illiquid-but-solvent institutions, or prop up insolvent ones masquerading as merely illiquid—precisely the dynamic Diamond and Dybvig (1983) modeled when they showed that demand-deposit contracts make banks vulnerable to self-fulfilling runs even when underlying assets remain sound, motivating deposit insurance and lender-of-last-resort facilities as remedies for liquidity—not solvency—failure.
- Maturity Mismatch
- In banking and finance — the canonical case — banks hold long-tenor loans funded by short-tenor deposits, and loss of deposit funding produces a run even when the loans are sound.
This sourceCanonical model of maturity transformation: banks funding illiquid long assets with demandable short deposits are exposed to runs even when solvent.
Supported in partVerified against the publisher's abstract
The 1983 abstract confirms demand deposits have multiple equilibria, one a bank run, and that runs cause real damage rather than merely reflecting other problems; it does not itself state the long-asset/short-deposit funding structure.
“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.”
- In banking and finance — the canonical case — banks hold long-tenor loans funded by short-tenor deposits, and loss of deposit funding produces a run even when the loans are sound.
- Moral Hazard
- Listed in the references but not attached to a specific claim.
- Peltzman Effect
- A government guarantee (insured deposits, an implicit bailout) lowers that cost of failure: depositors no longer run, so the discipline they imposed evaporates.
This sourceShows deposit insurance removes the run discipline depositors impose, shifting bank risk preferences — the moral-hazard mechanism.
Supported in partVerified against the publisher's abstract
The abstract establishes that deposit insurance can remove the run equilibrium and, under some circumstances, yield superior contracts, but it states no risk-shifting or moral-hazard consequence of the guarantee.
“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.”
- A government guarantee (insured deposits, an implicit bailout) lowers that cost of failure: depositors no longer run, so the discipline they imposed evaporates.
- Private-Public Preference Divergence
- In markets and finance, it is the gap between privately-held valuation and publicly-expressed sentiment: a bubble sustained by public bullishness each participant privately suspects is overvalued but will not be the one to call (with the post-crash "everyone secretly knew it was overpriced" recognition as the gap's exposure), analysts shading reports toward the dominant narrative under reputational cost, and the bank run as the inverse cascade
This sourceModels the bank run as a self-fulfilling reorientation of expressed confidence emptying a solvent institution.
Supported in partVerified against the publisher's abstract
The abstract carries the bank-run clause only: a run is one of multiple self-fulfilling equilibria; it says nothing of private/public divergence or analysts shading reports.
“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.”
- In markets and finance, it is the gap between privately-held valuation and publicly-expressed sentiment: a bubble sustained by public bullishness each participant privately suspects is overvalued but will not be the one to call (with the post-crash "everyone secretly knew it was overpriced" recognition as the gap's exposure), analysts shading reports toward the dominant narrative under reputational cost, and the bank run as the inverse cascade
- Self-Fulfilling Prophecy
- Economics and finance: bank runs and currency crises (Diamond and Dybvig models, Krugman on second-generation crises) demonstrate how expectation-driven coordination produces crisis equilibria
This sourceCanonical model showing that demand-deposit contracts create maturity-transformation services but expose banks to self-fulfilling runs even when underlying assets are fundamentally sound; establishes deposit insurance and lender-of-last-resort facilities as remedies for liquidity—not solvency—failure.
Supported in partVerified against the publisher's abstract
Diamond & Dybvig's own abstract states that demand-deposit contracts have multiple equilibria, one of which is a bank run, backing the bank-run half of the claim but saying nothing about currency crises.
“Traditional demand deposit contracts which provide liquidity have multiple equilibria, one of which is a bank run.”
- Economics and finance: bank runs and currency crises (Diamond and Dybvig models, Krugman on second-generation crises) demonstrate how expectation-driven coordination produces crisis equilibria
- Stock Disabled Control
- The identical structure governs a collapsed fishery (quota tweaks fail once breeding biomass falls below the reproductive threshold; only closure and biomass recovery work) and an institution that has lost legitimacy (better messaging fails once the trust stock is depleted; only demonstrated reform rebuilds it).
This sourceFoundational model of self-reinforcing depositor withdrawal producing a collapse regime, used here as a structural analogue to stock-depletion-driven control failure.
- The identical structure governs a collapsed fishery (quota tweaks fail once breeding biomass falls below the reproductive threshold; only closure and biomass recovery work) and an institution that has lost legitimacy (better messaging fails once the trust stock is depleted; only demonstrated reform rebuilds it).
- Strategic Complementarity
- Financial markets: in liquidity runs, each withdrawer increases the optimality of others withdrawing, bank-run mathematics being complementarity with a payoff cliff.
This sourceCanonical bank-run model: each withdrawal raises the optimality of others withdrawing (a positive cross-partial with a payoff cliff), yielding good and bad equilibria that deposit insurance collapses by flattening the complementarity.
Supported in partVerified against the publisher's abstract
The abstract states that demand-deposit contracts have multiple equilibria, one of them a bank run, and that deposit insurance can produce superior contracts, but it does not state the per-withdrawer complementarity or any payoff cliff.
“Traditional demand deposit contracts which provide liquidity have multiple equilibria, one of which is a bank run.”
- Financial markets: in liquidity runs, each withdrawer increases the optimality of others withdrawing, bank-run mathematics being complementarity with a payoff cliff.
- Thundering Herd
- In finance it is the bank run, where a shared signal — solvency doubt — turns a slow withdrawal stream into a synchronized one, and the ticket-on-sale or product-launch demand pulse.
This sourceModels the bank run as a coordinated rush in which a shared signal synchronizes withdrawals against finite reserves, with suspension of convertibility as a mitigation.
Supported in partVerified against the publisher's abstract
The abstract states that demand-deposit contracts have multiple equilibria, one of which is a bank run, backing only the finance half of the claim; it says nothing about ampacity, utility re-energization, or ticket/launch demand pulses.
“Traditional demand deposit contracts which provide liquidity have multiple equilibria, one of which is a bank run.”
- In finance it is the bank run, where a shared signal — solvency doubt — turns a slow withdrawal stream into a synchronized one, and the ticket-on-sale or product-launch demand pulse.
Domain-specific¶
- Bank Run
- Because the immediately available pool is finite, early exit improves an individual claimant's chance of full repayment while each withdrawal worsens the position of those who remain
This sourceThe sequential-service payout at the centre of the Diamond-Dybvig model, under which claimants are paid in arrival order out of a finite pool, so that withdrawing early raises one's own expected recovery and lowers everyone else's. The Diamond-Dybvig result that the run equilibrium arises for a bank whose assets held to maturity would cover its deposits, so that premature liquidation, not prior insolvency, creates the shortfall.
SupportedVerified against the source
- Because the immediately available pool is finite, early exit improves an individual claimant's chance of full repayment while each withdrawal worsens the position of those who remain
- Funding Fragility
- An entity can be technically solvent on a marked-to-par accounting basis while simultaneously unable to survive the withdrawal of its short-term financing, because the assets cannot be liquidated at par quickly enough to meet the outflow — the Diamond-Dybvig structure in which all depositors withdrawing is self-fulfilling precisely because no single depositor can know whether others will
This sourceThe Diamond-Dybvig depository-banking case, in which demand deposits fund illiquid long loans and the depositors' confidence can flip from efficient risk sharing into a run. Douglas Diamond and Philip Dybvig's 1983 model of bank runs, deposit insurance and liquidity.
Supported in partVerified against the work's full text
“Then, it may be his best response to refuse to roll over his loans even if the firm would be solvent if all loans were rolled over.”
- An entity can be technically solvent on a marked-to-par accounting basis while simultaneously unable to survive the withdrawal of its short-term financing, because the assets cannot be liquidated at par quickly enough to meet the outflow — the Diamond-Dybvig structure in which all depositors withdrawing is self-fulfilling precisely because no single depositor can know whether others will
Verification¶
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