A Study On The Effectiveness Of The Policy For Bank Runs

Under the guidance of financial liberalization theories created by McKinnon and Shaw, manydeveloping countries move towards opening their financial systems since1970s. With the capital flowliberalization, the financial crisis broke out among these developing economies after a quite shortperiod of economic boom. Particularly in Latin America and Asia, the bank run crisis brought thesenations tremendous losses.Built on expanded Diamond-Dibvig model, this thesis study ex post efficient policy response-thesuspension of convertibility and the lender of last resort policy-to a bank run on banking system andthe ex ante incentives these responses give to depositors.First, this paper will tell you the incentives that a banking authority faces in deciding when todeclare a deposit freeze and how this ex post decision, in turn, affects the ex ante incentives ofdepositors to participate in a run. Second, if there exist a court system that can decide wether torescheduling payment, how such court interventions can affect the fragility of banking system. Then,the paper will tell you the main factors that affect the effectiveness of the lender of last resort policy.The results show that the depositor’s type, the degree of risk aversion and when the government wouldresponse to a run are the main influencing factors for the policy of he suspension of convertibility. Tothe lender of last resort policy, the main influencing factors are the depositor’s type, the time thatgovernment choose to response to a run and the loan interest rate.