Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/210777
Authors: 
Ahnert, Toni
Elamin, Mahmoud
Year of Publication: 
2019
Series/Report no.: 
Bank of Canada Staff Working Paper 2019-37
Abstract: 
We examine the portfolio choice of banks in a micro-funded model of runs. To insure riskaverse investors against liquidity risk, competitive banks offer demand deposits. We use global games to link the probability of a bank run to the portfolio choice. Based upon interim information about risky investment, banks liquidate investments to hold a safe asset. This partial hedge against investment risk reduces the withdrawal incentives of investors for a given deposit rate. As a result of the portfolio choice, (i) banks provide more liquidity ex ante (so banks offer a higher deposit rate), and (ii) the welfare of investors increases.
Subjects: 
Financial institutions
Financial stability
Wholesale funding
JEL: 
G01
G21
Document Type: 
Working Paper

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