Ensuring Financial Stability with Large Depositors

Working papers (original series) | 1999 | N 11

Abstract

Using a version of the model of Diamond-Dybvig in which a block of depositors move together stochastically, I look for the type of contracts that a bank can always fulfill. I consider economies with liquidity and capital requirements placed on large deposits where the banks can offer positive net interest rates to their depositors. The results suggest that carefully chosen capital requirements on large deposits result in higher utility than liquidity requirements with approximately the same first period interest rate.