Avoiding bank runs in transition economies: The role of risk neutral capital

Shubhashis Gangopadhyay, Gurbachan Singh
  • Journal of Banking & Finance, April 2000, Elsevier
  • DOI: 10.1016/s0378-4266(99)00083-7

Bank runs, and capital adequacy

What is it about?

Why do bank runs happen? The usual view is that this is a liquidity problem. However, this paper shows that the basic problem lies in inadequate capital with banks.

Why is it important?

During the financial crisis, the importance of capital adequacy (and limited leverage) has been realised. See, for example, the book by Admati and Hellwig (2013). However, long before all this, my paper (with S Gangopadhyay) showed how capital adequacy is critical.


Gurbachan Singh

Milton Friedman's focus was on liquidity in the context of bank runs. Later, Diamond and Dybvig (1983) reiterated the role of liquidity. Our paper on the other hand shows that the root problem lies in inadequate capital. It is also important to see the work by Charles Calomiris who has yet another view (which is also important).

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The following have contributed to this page: Gurbachan Singh