In the context of banking theory, the 'Diamond-Dybvig' model explains:
A. Why banks never face runs
B. The existence of banks as providers of liquidity insurance and the possibility of bank runs
C. Only the role of banks in solving adverse selection
D. Only the role of banks in monitoring firms
Answer: Option B
Solution (By JKSSB Mock Tests)
The Diamond-Dybvig model shows that banks transform illiquid assets into liquid liabilities, providing liquidity insurance to depositors, but that this arrangement is vulnerable to self-fulfilling runs.
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