What is the bank instability problem? Understand the Bryant and Diamond models o

Question

What is the bank instability problem? Understand the Bryant and Diamond models of bank runs. I want you to understand the quantitative logic of the problem. Memorizing formulas is not the point here. Be able to understand how my decision about whether to wait for my return or not depends on what I expect others to do. Notice that information problems are important in fully understanding the problem. What are the solutions to the bank instability problem? Understand how they work. What is the role of asymmetric information in creating the bank instability problem? Explain the connection between the solution to the bank instability problem that we have adopted and the necessity for bank regulation. Relate to the problem of moral hazard in debt finance.

Explanation / Answer

In this model unstability can be result of customers asking back their money from the banks.

The full concept:

Usually banks have a fixed CRR ( Cash reserve ratio) That it needs to maintain, The central bank of the country have this norm and banks must keep their reserves. Usually CRR wont exceed 20%, The other amount is lent to economy.

If depositers of the bank who have money in savings and checking accounts want their entire money back, Banks would not be in a position to give back that money. This will result in a crisis where banks just would even fail to give the cash asked by depositers,

This problem is well known to even countries central banks, but sometimes under pressure these banks decrease the CRR to stimulate the economy this will lead to further chaos, No bank anywhere on this planet is immune to such situation. No bank has 100% CRR so in principle if depositers enmasse withdraw money from bank, Banks will have no cash to supply them.

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