Banking
The Diamond-Dybvig model
Banks usually make loans that they cannot withdraw at short notice, and pay for them with deposits that can be withdawn without notice. This is referred to as a situation in which a bank's liabilities are more liquid than its assets. A bank is said to suffer a liquidity crisis if too many depositors attempt to withdraw their money at one time - a situation referred to as a bank run. The Diamond-Dybvig model explains why banks choose to issue deposits that are more liquid than their assets and why banks are subject to runs. It is a highly stylised three-period one bank construction that makes use of the game theory concept of a Nash equilibrium to derive its conclusions. [1]. The model has been widely used as theoretical framework for analyzing the economics of banking and banking policy