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¶
12 citations across 12 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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
Verification¶
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