Avoiding bank runs in transition economies: The role of risk neutral capital
نویسندگان
چکیده
In a general equilibrium model with risk neutral and risk averse agents, we show that if banks issue both demand deposits and equity, then free banking is run-proof and ecient. In particular, we obtain the ®rst best insurance solution if there is adequate risk neutral capital. If sucient risk neutral capital is unavailable, then a partial suspension of convertibility is optimal. In general, therefore, policies like capital adequacy norms and deposit insurance are neither necessary nor desirable. Ó 2000 Elsevier Science B.V. All rights reserved. JEL classi®cation: G28; G21
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