n Studies in Economics and Econometrics - Financial fragility : an assessment

Volume 33, Issue 2
  • ISSN : 0379-6205


The literature on bank runs and financial fragility suggests that banks may overcome the problem of incomplete markets by acting as central planners which pool all their customers' deposits, and thereby transform an uncertain environment to one of no aggregate uncertainty. This leads to the possibility of bank runs where a large group of depositors may decide to withdraw their deposits from the bank for fear that others may do the same. It is argued in this paper that despite being able to pool all customers' deposits, the most a bank can do is transform an environment of incomplete markets to one of complete markets where uncertainty still prevails. This has monetary implications.

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