Abstract and Headnote
We extend the usual bank-runs model (1) to capture the payments and transactions
roles of checking accounts and (2) to allow for sunspots-triggered runs.
If there are no restrictions on their portfolios, banks are immune to runs, but
they ration depositors with positive probability. If, on the other hand, banks
are not permitted to hold illiquid assets, then the optimal deposit contract tolerates
runs that occur with small probability. For reasonable parameter values,
restricted banks overinvest in the liquid asset and they avoid non-run rationing
of depositors.