Households’ Savings, HIV/AIDS and Banking Stability in Developing Countries

We argue that the recent large drops in households' savings in developing countries with high HIV/AIDS prevalence is associated with the spread of the disease. We also argue that the need to pay for individual treatments force large-scale withdrawals of households deposits, and that those large withdrawals put the banking industry at risk. In a standard demand-deposit model where the HIV prevalence among depositors is random, we show that 1.) The probability of a large-scale banking failure without bank run increases as the odd of any prevalence level increases, and 2.) It is always optimal to deposit, and thus to accept the risk of banking failure, to maintain long-term investments in place