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Mr. Ashoka Mody and Mr. Se-Jik Kim

. Viewing such early bailouts, depositors of all the banks whose liquidity condition will be revealed only in the future (including the otherwise sound banks) may lose confidence (i.e., expectation that their deposits will be fully protected) and run to withdraw their deposits. To prevent such an economy-wide loss of confidence, the government may need to reassure depositors that there will be no liquidity shortage in the future. For this, the government may, by closing illiquid banks today, save sufficient liquidity to bail out all the illiquid banks in the future. In