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Later during the bank run deposit guarantee was used as tool to stop it. The run on the bank was significantly reduced after the government guaranteed all the deposits in Northern Rock bank. All the measures taken by government to stop the run did not work, Only after the announcement of the guarantee the run came to an end. There was a real impact after the hundred percent guarantee deposits guarantee was announced by the government. The share prices which fell sharply on the 14th and on the 17th morning went up after the government guaranteed the deposits to its customers. There was a desired impact after the announcement came.

A well designed compensation scheme should help to stop the bank runs or it can trigger a blown contagion and can cause financial instability. I will be discussing the reasons for the failure role in this paper.

2.) THE LIQUIDITY INSURANCE MODEL WITH THE NORTHERN ROCK

The Diamond and Dybvig (1983) model has made a very important contribution to the theory of banking. In this section I am using this model to explain the bank runs and bringing out the effectiveness of deposit insurance in the financial system. I will be relating the run on Northern Rock with this model show how the run occured. The model explains banks are subject to runs and it will have liquidity problems and it brings out deposit insurance as effective solution to stop bank run. Under this model the banks act as intermediaries between depositors and borrowers, it shows the important function of banks is to create liquidity. The model views bank run as self -filling prophecy.

2.1 The model

The model considers 3 period economy, t= 0, t = 1and t = 2 with one good which can be stored or invested in a productive illiquid technology. There are two type of depositors type 1 depositors are early consumers, will consume when t = 1and type 2 depositors make their consumption late at t = 2. For simplicity the depositor who withdraw early are D1and the patient depositors are D2. The depositors D1 and D2 are uncertain of the time they will be withdrawing their money from the bank during time t = 0. The banks only know the本论文由英语论文网提供整理，提供论文代写，英语论文代写，代写论文，代写英语论文，代写留学生论文，代写英文论文，留学生论文代写相关核心关键词搜索。