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There is two type of equilibrium one efficient and inefficient. The inefficient equilibrium is in the case of Northern Rock were there was a coordination failure, that is when all the depositors went at the same time to withdraw their deposits. This scenario of Northern Rock shows the existence of this equilibrium. The run on the bank reduced the liquidity of the bank and the bank had to rely on Bank of England for every day financing. In absence of Bank of England the Northern Rock will have no other choice but to liquidate its asset to meet the depositors. As seen in the model early liquidation will lead to situation were the value of its liabilities will be more than its assets. Value assets during premature liquidation will be

λ1 D1* +(1- λ1 D1*)L<1,

This show the run on the bank will lead to failure as it is impossible for the bank to meet all the withdrawals at one particular time, as they only have fraction of liquid assets and a premature liquidation will cause a bank run.

This scenario shows not only psychological reactions can cause a bank run, but it will have a fundamental origin. The initial reason of the bank run was information based, that is when the late consumers received a signal on the banks performance. With the practical experience on the Northern Rock we can see the existence of this equilibrium. The run on Northern Rock combines fundamental bank runs (information about poor performance of the bank) and followed by the equilibrium depicted in the model of Diamond and Dybvig.

2.4 PREVENTION OF BANK RUN

There are many studies to bring out a solution to prevent the bank runs, the problem of bank runs can be prevented by suspension of convertibility, lender of lost resort facility , narrow banking system and with the use of deposit insurance system.

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