Skip to main content

The Effect of Safe Assets on Financial Fragility in a Bank-Run Model


Risk-averse investors induce competitive intermediaries to hold safe assets, thereby lowering the probability of a run and reducing financial fragility. We revisit Goldstein and Pauzner (2005), who obtain a unique equilibrium in the banking model of Diamond and Dybvig (1983) by introducing risky investment and noisy private signals. We show that, in the optimal demand-deposit contract subject to sequential service, banks hold safe assets to insure investors against investment risk. Consequently, fewer investors withdraw prematurely, which reduces the probability of a bank run. Safe asset holdings increase investor welfare and may increase the bank’s provision of liquidity.

Keywords: bank runs, demand deposits, global games, liquidity provision, safe assets.

JEL classifications: D8, G21.


Suggested citation: Ahnert, Toni, and Mahmoud Elamin, 2014. “The Effect of Safe Assets on Financial Fragility in a Bank-Run Model,” Federal Reserve Bank of Cleveland, Working Paper no. 14-37.

Upcoming EventsSEE ALL

  • 09.15.22

    FedUniversity: Internships at the Federal Reserve Bank of Cleveland

    Join us on September 15, noon to 1:00pm, to learn about the Cleveland Fed’s annual internship program.

  • 09.29.22

    Inflation: Drivers and Dynamics 2022

    Inflation: Drivers and Dynamics 2022, co-sponsored by the Center for Inflation Research and the European Central Bank will take place on September 29-30, 2022 in Cleveland, OH.

  • 10.06.22

    Conference on Real-Time Data Analysis, Methods, and Applications

    The Federal Reserve Bank of Cleveland is sponsoring the Annual Conference on Real-Time Data Analysis, Methods, and Applications in Macroeconomics and Finance to be held in Cleveland, Ohio, at the Cleveland Reserve Bank on Thursday and Friday, October 6–7, 2022.

  • 11.07.22

    Women in Economics Symposium

    Join the Federal Reserve Bank of Cleveland at the Women in Economics Symposium, which aims to encourage women to pursue a career in economics by discussing the successful career paths of diverse economics professionals and raising awareness of diversity and inclusion in the profession.

  • 11.17.22

    2022 Financial Stability Conference: Frontier Risks, a New Normal, and Policy Challenges

    The Federal Reserve Bank of Cleveland and the Office of Financial Research will host their 10th annual financial stability conference on November 17–18, 2022. This year’s conference is titled Financial Stability: Frontier Risks, a New Normal, and Policy Challenges.