How does forcing banks to hold liquid assets influence the chance of a run? Because a bank’s exact need for liquidity is difficult to know in real time, depositors have incomplete information about its ability to survive a run. The incomplete information means that a bank is not automatically incentivized to hold enough liquid assets to survive runs. Regulations similar to those implemented recently can change the bank’s incentives so that runs are less likely.
At this talk, Douglas W. Diamond of Chicago Booth discussed how these regulations can be improved.
Diamond, an expert in the study of financial intermediaries, financial crises, and liquidity, is the Merton H. Miller Distinguished Service Professor of Finance. He is a visiting scholar at the Federal Reserve Bank of Richmond and was among several distinguished scholars of finance contributing to “The Squam Lake Report : Fixing the Financial System” in 2010.