abstract

This paper offers an example of the game in which banks make lending and borrowing decisions　while depositors choose when to withdraw, to better understand how the interbank market rescues a　bank at risk of bank runs. Our example is based on Postlewaite & Vives (1987) and adds banks and　the interbank market. We show that there is a Bayesian perfect equilibrium in which the interbank　market collapses and a bank run occurs. There is also an equilibrium where banks refuse to lend　and a bank run happens when a situation of the bank run (strategic withdrawal) is associated with　a situation of default of the rescue loan. Therefore, the interbank market alone does not necessarily　save a bank at risk of bank runs.