Bank failures during banking crises, in theory, can result either from unwarranted depositor withdrawals during events characterized by contagion or panic, or as the result of fundamental bank insolvency. Various views of contagion are described and compared to historical evidence from banking...

We develop a theory of bank liquidity (cash reserve) requirements. Because cash is both observable and riskless, greater cash holdings improve bank incentives to manage risk in the remaining, non-cash portfolio of risky assets. In a model with a single bank, cash is held voluntarily to stem...