ABSTRACT
The purpose of this chapter is to pave the way for a clear understanding of the problem of bank runs. The latter is rooted in the mismatch between the two sides of the balance sheet of a commercial bank. The assets of a bank are typically illiquid, whereas most of its liabilities are effectively demand deposits and so redemption can be demanded on an immediate basis. Given that the assets are illiquid, the use of demand deposits seems to be at the root of the possible problem of a bank run. Therefore, it is important to understand why demand deposits are issued at all. 1
