We propose a model of lending, payments choice, and privacy in the digital economy. While digital payments enable merchants to sell goods online, they reveal information to their lender. Cash guarantees anonymity, but limits distribution to less efficient offline venues. In equilibrium, merchants trade off the efficiency gains from online distribution (with digital payments) and the informational...

Shocks to a bank's ability to raise liquidity at short notice can trigger a depositor panic. We study contingent risk management (hedging such shocks) in a global-games model of bank runs. A bank's risk management is non-monotone in the shock severity: marginal hedging incentives first increase and then decrease as shocks become more severe. As a result, the bank forgoes risk management for sufficiently severe...

We study the liquidity choice of a bank subject to rollover risk and support from a lender of last resort (LLR) and study the consequences for bank stability, funding costs, and liquidity regulation. The liquidity choice balances forgoing profitable yet illiquid investment with fewer panic runs and cheaper debt. A higher LLR penalty rate increases bank liquidity and has a V-shaped effect on ex-ante bank...

We develop a model of financial intermediation with remunerated Central Bank Digital Currency (CBDC) as consumers’ alternative to bank deposits and an endogenous risk of bank runs. Echoing widespread concerns, higher CBDC remuneration raises bank fragility by increasing consumers’ withdrawal incentives. On the other hand, it also induces banks to offer more attractive deposit contracts in order to retain funding, thereby reducing fragility. This results...