Bank runs with many small banks and mutual guarantees at the terminal stage

Abstract

In this paper, we develop a model in the spirit of Diamond and Dybvig (J Polit Econ 91(3):401–419, 1983), with bank-specific sequential-service constraints and commitment to a redistribution policy at the terminal date. In the good equilibrium, some insurance is provided against the risk of being affiliated with a bank with too many impatient depositors. We also find, however, that an unpleasant arithmetic takes place in a bad equilibrium, with patient depositors realizing they can be heavily taxed since runs are reducing savings in other banks, which in turn changes the ability of their own bank to induce truth-telling. We prove that even the disclosure device proposed by Green and Lin (J Econ Theory 109(1):1–23, 2003) may not remove bank-run equilibria.