Run theorems for low returns and large banks

Abstract

In this paper, we revisit the issue of bank fragility in the Diamond and Dybvig (J Polit Econ 91:401-419, 1983) model with sequential service and finite traders. We provide a precise condition under which banks are susceptible to a run when the return on investment is low, and we show that sufficiently large banks are always susceptible to a run. One interpretation of the condition is that exposure to runs occurs when desire for consumption smoothing or predictability of preference profiles are relatively high.