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Assume that a bank operates with the Diamond and Dybvig framework. As a result of a bank run, the bank has to liquidate its investment
Assume that a bank operates with the Diamond and Dybvig framework. As a result of a bank run, the bank has to liquidate its investment prematurely at a price of (1 w) of the value of the invested asset (w: the wastage or loss rate). If the bank capital ratio to the value of the invested asset, k, is 7.6% and the wastage rate, w, is 15%, what percentage of the deposits will be repaid in case of a bank run without any backstop?
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