Bank Runs and Institutions: The Perils of Intervention

American Economic Review (Impact Factor: 2.69). 02/2007; 99(4). DOI: 10.2139/ssrn.2186651
Source: RePEc


We study ex post efficient policy responses to a run on the banking system and the ex ante incentives these responses create. We show that the efficient response to a run is typically not to freeze all remaining deposits, since doing so imposes heavy costs on some individuals. Instead, once a run is underway, (benevolent) government institutions would allow additional deposit withdrawals, placing further strain on the banking system. When depositors anticipate these extra withdrawals, their incentive to participate in the run increases. In fact, ex post efficient interventions can generate the conditions necessary for a self-fulfilling run to occur.

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    • "Most theoretical papers assume that depositors make the decision about withdrawal of funds simultaneously (e.g. Diamond and Dybvig, 1983; Ennis and Keister, 2009). A notable exception is Kinateder and Kiss (2014) who suppose that depositors decide after each other according to a predetermined order (line) and they observe all previous choices before making decision. "
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    DESCRIPTION: Empirical descriptions and studies suggest that generally depositors observe a sample of previous decisions before deciding if to keep their funds deposited or to withdraw them. These observed decisions may exhibit different degrees of correlation across depositors. In our model depositors are assumed to follow the law of small numbers in the sense that they believe that a bank run is underway if the number of observed withdrawals in their sample is large. Theoretically, with highly correlated samples and infinite depositors runs occur with certainty, while with random samples it needs not be the case, as for many parameter settings the likelihood of bank runs is less than one. To investigate the intermediate cases, we use simulations and find that decreasing the correlation reduces the likelihood of bank runs, often in a non-linear way. Moreover, bank runs tend to start later when the correlation decreases. We also study the effect of the sample size and show that increasing it makes bank runs less likely. Our results have relevant policy implications.
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    • "În ce privete actuala criz global, a crei dimensiune financiar este evident, cu toate c în prezent ar fi, poate, prematur o evaluare aprofundat a consecinelor în planul orientrilor doctrinare, este de netgduit necesitatea unor schimbri de amploare în funcionarea sistemelor macroeconomice (Curdia & Woodford, 2009; Krugman, 2009; Wessel, 2009; Bean et al., 2010; Blanchard et al., 2010; Turner, 2010; Mishkin, 2011). Câteva din circumstanele care au favorizat declanarea i propagarea crizei: datoriile publice nesustenabile, tranzaciile speculative de pe pieele financiare i imobiliare, riscurile de amploare asumate în sectorul bancar au fcut obiectul unor studii care au formulat i soluii de prevenie (Taylor, 2007; Calomiris, 2009; Canova & Gambetti, 2009; Ennis & Keister, 2009; Fratzscher, 2009; Gambacorta, 2009; Meier, 2009; Mishkin, 2009; Obstfeld et al., 2009; Reinhart & Rogoff, 2009; White, 2009; Boivin et al., 2010; Eickmeier & Hofmann, 2010). Circumstanele crizei au obligat guvernele s se implice masiv în economie, aceast evoluie putând fi considerat drept o revenire la unele din principiile keynesismului. "
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    ABSTRACT: În timpul ultimelor decenii, politica monetară a trebuit să facă faţă unor schimbări semnificative cauzate de diferite procese. Această lucrare studiază provocările induse de recenta criză globală pentru politicile băncilor centrale. Vom aborda câteva posibile soluţii pentru consecinţele dramatice ale crizei: abandonul doctrinei monetariste şi revenirea la keynesism, orientarea către ocuparea forţei de muncă în detrimentul stabilităţii preţurilor, o cooperare mai intensă între politica monetară şi cea fiscală precum şi noi reglementări menite să prevină implicarea băncilor în formarea baloanelor speculative ale activelor financiare.During the last decades, the monetary policy had to face significant changes caused by various processes. This paper explores the challenges induced by the recent global crisis to the central banks policies. We approach some possible solutions to the dramatic consequences of the crisis: the abandon of the monetarism and the return to Keynesian principles, orientation towards the full employment in detriment of the prices stability, a more intense coordination between fiscal and monetary policies and new regulations to prevent the banks involvement in asset price bubbles.
    SSRN Electronic Journal 01/2013; DOI:10.2139/ssrn.2332845
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    • "2 In particular , a bank is free to adjust the payment it gives to its remaining depositors when new information arrives. We follow Ennis and Keister (2009, 2010) in assuming that banks cannot commit to future actions; each acts to maximize the expected utility of its depositors at all times. This inability to commit implies that they are unable to use the type of suspension of convertibility plans discussed in Diamond and Dybvig (1983) or the type of run-proof contracts studied in Cooper and Ross (1998). "
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    ABSTRACT: There is a longstanding debate about whether banking panics and other financial crises always have fundamental causes or are sometimes the result of self-fulfilling beliefs. Disagreement on this point would seem to present a serious obstacle to designing policies that promote financial stability. However, we show that the appropriate choice of policy is invariant to the underlying cause of banking panics in some situations. In our model, the anticipation of being bailed out in the event of a crisis distorts the incentives of financial institutions and their investors. Two policies that aim to correct this distortion are compared: restricting policymakers from engaging in bailouts, and allowing bailouts but taxing the short-term liabilities of financial institutions. We find that the latter policy yields higher equilibrium welfare regardless of whether panics are sometimes caused by self-fulfilling beliefs.
    SSRN Electronic Journal 10/2011; DOI:10.2139/ssrn.1939922
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