Financial Deepening and Bank Runs

We analyze an economy with banks and markets and uncover impli-cations of the presence of asset markets for the run-prone banking sector. Consumers can split their endowment between a market investment and a deposit contract which admits bank runs. Banks specialize in provid-ing ex ante liquidity insurance. Market investment acts as insurance if there is a run. Banks provide a higher degree of the liquidity insurance while facing a lower probability of a run when compared to the banks-only economy. As long as consumers invest in both the market and the deposit contract, the welfare is higher when compared to the economy with banks, or markets, alone