Journal of Financial Services Research

, Volume 7, Issue 4, pp 347-364

First online:

In defense of bank suspension

  • George SelginAffiliated withDepartment of Economics, University of Georgia

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Resort to bank suspension is generally viewed as an unacceptable means for coping with bank panics, in part because suspension is assumed to involve unacceptably high welfare costs. In Diamond and Dybvig (1983), suspension is costly because it interferes with agents' welfare-maximizing consumption plans. Here a modified version of the Diamond-Dybvig model is used to show how suspension may have only minor welfare costs so long as bank debt is transactable and can serve as a medium of exchange.