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Type Conference Presentation
Scope Discipline-based scholarship
Title Cooperative banking and fi…nancial stability
Organization Unit
Authors
  • Christian Ewerhart
  • Robertas Zubrickas
Presentation Type paper
Item Subtype Original Work
Refereed Yes
Status Published in final form
Language
  • English
Event Title 27th Annual Congress of the European Economic Association
Event Type conference
Event Location Málaga (Spain)
Event Start Date August 27 - 2012
Event End Date August 31 - 2012
Abstract Text This paper explores the consequences of incorporating social preferences into a standard model of liquidity insurance and bank runs. Somewhat unexpectedly, a general tension arises between depositors' preference for egalitarian treatment and financial stability. In technical terms, for nonincreasing absolute risk aversion, and envy being weakly stronger than compassion, runs that deplete the banks of its assets under selfish preferences are never mitigated through pro-social preferences whereas stable banks may become unstable under pro-social preferences. We iden- tify, however, two basic channels through which social preferences may nevertheless have a stabilizing effect on the fractional reserve banking system. First, psychologi- cal factors may have a role if premature withdrawals imply a reduction of the assets that remain for other members of the reference group. Second, pro-social agents may choose an investment portfolio that leads to a more conservative consumption pattern. We show that each of these effects may, in the presence of complementing factors, be strong enough to inhibit a bank run. In particular, our findings suggest an economic interpretation of the notion of "common bond" that is often referred to in informal writings on cooperative banking.
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Official URL http://www.eea-esem.com/eea-esem/2012/m/viewpaper.asp?pid=2716
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