To provide maturity transformation, banks need a deposit base – deposits that could be, but are not, withdrawn most of the time and are, thus, used for long-termlending. In a global-games environment, we show that a higher deposit base protects banks against panic runs. As depositors become more flexible in their bank relations, keeping multiple accounts at different institutions, the deposit base of banks changes. We analyze the impact of multi-banking on bank stability and show that in an economy with specialized institutions, households allocate too few funds to maturity-transforming institutions (banks). A policy-maker should support the banks, even though they are more fragile. If only some institutions are protected by deposit insurance, the deposit base moves away from the unprotected institutions, leaving them more prone to runs.
|Name||CRC TR 224 Discussion Paper Series, 2019|
- Bank runs
- Deposit base
- Global games
- Financial stability