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Discussion Paper
Gates, Fees, and Preemptive Runs
In the academic literature on banks, ?suspension of convertibility??that is, preventing the exchange of deposits at par for cash?has traditionally been seen as a potential means of preventing economically damaging bank runs. In this post, however, we show that giving a financial intermediary (FI) the option to suspend convertibility may ultimately increase the risk of runs by causing preemptive runs. That is, investors who face potential restrictions on their future access to cash may run when they anticipate that such restrictions may be imposed.