In defense of bank suspension

Abstract

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.

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My thanks go to Kevin Dowd, Robert Eisenbeis, George Kaufman, Bill Lastrapes, Dick Timberlake, Lawrence H. White, William Woolsey, and two anonymous referees for their suggestions. The article's remaining faults

My thanks go to Kevin Dowd, Robert Eisenbeis, George Kaufman, Bill Lastrapes, Dick Timberlake, Lawrence H. White, William Woolsey, and two anonymous referees for their suggestions. The article's remaining faults

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Selgin, G. In defense of bank suspension. J Finan Serv Res 7, 347–364 (1993). https://doi.org/10.1007/BF01046928

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Keywords

  • High Welfare
  • Welfare Cost
  • Bank Debt
  • Consumption Plan
  • Bank Panic