lec07_01 - ECON4721 Money and Banking Lecture 07_01 Satoshi...

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Unformatted text preview: ECON4721 Money and Banking Lecture 07_01 Satoshi Tanaka University of Minnesota Nov 9, 2011 Satoshi Tanaka ECON4721 Money and Banking Lecture 07_01 ECON4721 Money and Banking Simple Model of Bank Runs Satoshi Tanaka ECON4721 Money and Banking Lecture 07_01 Today's Question The banks we have studied so far have been very simple. They face no risk and are always solvent. In contrast, we observe many instances of failures of banks in the world. A bank run/bank failure is when a bank is not able to pay back the promised return on deposits. How can we model a bank run? Satoshi Tanaka ECON4721 Money and Banking Lecture 07_01 Reasons for Bank Failure Two possible reasons for bank failures. 1 Bank holding of risky assets- a bank may fail because the assets it owns may realize such unexpectedly low returns that the bank no longer has the resources to pay depositors. 2 Runs on bank- if a sudden rush of withdrawals forces it to sell o assets at a loss. We will look at the second possibility here. Satoshi Tanaka ECON4721 Money and Banking Lecture 07_01 A Model of Demand Deposit Banking Large mass of consumers, who live for 3 periods . They have some endowment when young y , and nothing when middle-aged and when old. At the time when they make saving decisions, they don't know when they will want to consume . Some people will want to save for middle age and some people will want to save for old age. They only nd this out in the beginning of second period of life....
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This note was uploaded on 02/07/2012 for the course ECON 4721H taught by Professor Tanaka during the Fall '11 term at Minnesota.

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lec07_01 - ECON4721 Money and Banking Lecture 07_01 Satoshi...

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