The Diamond-Dybvig model provides a rationale for the phenomenon of

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The Diamond-Dybvig model explains the possibility of bank runs in a fractional reserve banking system where depositors can withdraw their money at any time, while the bank holds illiquid assets. This model suggests that banks can be stable as long as not all depositors want their money back at the same time. However, if there is a sudden loss of confidence in the bank or a rumor of insolvency, depositors may rush to withdraw their funds, creating a bank run. Thus, the Diamond-Dybvig model provides a rationale for the phenomenon of bank runs.

The Diamond-Dybvig Model Provides a Rationale for the Phenomenon of