1. Allen and Gale (2000) analyse the financial fragility of a banking system where liquidity shocks are insured by means of deposits with peers.1 Under which conditions are banking systems subject to a bank run and then a domino effect on other banks in the system?

a. An incomplete market structure together with an unexpected shock to the total liquidity demand in the system lead to a bank failure and spread within the network generating contagion because of imperfect ex-ante insurance

b. Any structure of the banking system is fragile and subjected to run and contagion among peers

c. A complete market structure generates a higher probability of observing a domino effect because banks are more connected with each other and hence negative shocks propagate easily through the network

d. None of the above are sufficient conditions to observe a bank run and a domino effect in a banking system