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Bank Runs

Goal: We study bank runs as a coordination problem among depositors. We highlight the effects of observability of actions on depositors' behavior. We look at the determinants of bank runs and panic behavior.

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Ismael Rodriguez-Lara
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We study how lines form in front of banks. In our model, depositors choose first the level of effort to arrive early at the bank and then whether or not to withdraw their deposit. We argue that the informational environment (i.e., the possibility of observing the action of others) affects the emergence of bank runs and should, therefore, influence the line formation. We test this prediction experimentally. While the informational environment has no effect on the line formation when we look at the average level of effort, our findings suggest that the reasons to arrive early at the bank varies across informational environment. Thus, expectations on the occurrence of bank run are key to explain the level of effort when depositors cannot observe the action of others. In this setting, depositors who expect a run arrive early at the bank to withdraw their funds. If actions can be observed, however, those who expect a run arrive early at the bank to keep their funds deposited. Depending on the informational environment, there are other factors (e.g., irrationality of depositors or loss aversion) that also explain the behavior of depositors.
Hubert János Kiss
added a research item
This is the Chinese translation of "Depositors’ Behaviour in Times of Mass Deposit Withdrawals "
Hubert János Kiss
added a research item
Purpose The purpose of this paper is to analyze how response time in a laboratory experiment on bank runs affects withdrawal decisions. Design/methodology/approach In the authors’ setup, the bank has no fundamental problems, depositors decide sequentially whether to keep the money in the bank or to withdraw, and they may observe previous decisions depending on the information structure. The authors consider two levels of difficulty of decision-making conditional on the presence of strategic dominance and strategic uncertainty. The authors hypothesize that the more difficult the decision, the longer is the response time, and the predictive power of response time depends on difficulty. Findings The authors find that response time is longer in information sets with strategic uncertainty compared to those without (as expected), but the authors do not find such relationship when considering strategic dominance (contrary to the hypothesis). Response time correlates negatively with optimal decisions in information sets with a dominant strategy (contrary to the expectation) and also when decisions are obvious in the absence of strategic uncertainty (in line with the hypothesis). When there is strategic uncertainty, the authors find suggestive evidence that response time predicts optimal decisions. Research limitations/implications Being a laboratory experiment, it is questionable if depositors in real life behave similarly (external validity). Practical implications Since episodes of bank runs are characterized by strategic uncertainty, the result that under strategic uncertainty, longer response time leads to better decisions suggests that suspension of convertibility is a useful tool to curb banking panics. Originality/value To the best of authors’ knowledge, this is the first study concerning the relationship between response time and the optimality of decisions in a bank-run game.
Hubert János Kiss
added a research item
This paper introduces the possibility of signaling into a finite-depositor version of the Diamond-Dybvig model. More precisely, the decision to keep the funds in the bank is assumed to be unobservable, but depositors are allowed to make it observable by signaling, at a cost. Depositors decide consecutively whether to withdraw their funds or continue holding balances in the bank, and they choose if they want to signal the latter decision. If the cost of signaling is moderate, then bank runs do not occur. Moreover, no signals are made, so the unconstrained-efficient allocation is implemented without any costs.
Hubert János Kiss
added 4 research items
We assess the effect of cognitive abilities on withdrawal decisions in a bank-run game. In our setup, depositors choose sequentially between withdrawing or keeping their funds deposited in a common bank. Depositors may observe previous decisions depending on the information structure. Theoretically, the last depositor in the sequence of decisions has a dominant strategy and should always keep the funds deposited, regardless of what she observes (if anything). Recognizing the dominant strategy, however, is not always straightforward. If there exists strategic uncertainty (e.g., if the last depositor has no information regarding the decisions of predecessors), then the identification of the dominant strategy is more difficult than in a situation with no strategic uncertainty (e.g., the last depositor is informed about all previous decisions). We find that cognitive abilities, as measured by the Cognitive Reflection Test (CRT), predict withdrawals in the presence of strategic uncertainty (participants with stronger abilities tend to identify the dominant strategy more easily) but that the CRT does not predict behavior when strategic uncertainty is absent.
We report experimental evidence on gender differences in financial decision-making that involves three depositors choosing whether to keep their money deposited or to withdraw it. We find that one's position in the line, the fact that one is being observed and observed decisions are key determinants in explaining the subjects’ behavior. Our main result is that men and women do not react differently to what is observed. However, there are gender differences regarding the effect of being observed: women value the fact of being observed more, while men value the number of subsequent depositors who observe them. Interestingly, risk aversion has no predictive power on depositors’ behavior.
Ismael Rodriguez-Lara
added a research item
During financial crisis, depositors and investors react quickly to the enviroment, thus financial authorities do often rely on the suspension of convertibility (i.e., freezing deposits) to prevent bank runs episodes. However, it is unclear how response time shapes decisions during bank runs. To cover this gap, we report experimental evidence on the effects of response times on withdrawal decisions. In our setup, the bank has no fundamental problems, depositors decide sequentially whether to keep the money deposited in the bank or to withdraw it and may observe previous decisions depending on the information structure. Our design choice implies that there are two levels of difficulty when depositors make their decisions, namely strategic dominance (there are situations in which waiting or withdrawing is a dominant strategy) and the degree of strategic uncertainty (e.g., the fact that depositors may not observe what others have done might hinder the use of the dominant strategy). We find that response time is longer in information sets with strategic uncertainty compared to those without, but we do not find such relationship when considering strategic dominance. Response time correlates negatively with optimal decisions in information sets with a dominant strategy and also when decisions are obvious in the absence of strategic uncertainty. When there is strategic uncertainty, we find suggestive evidence that response time predicts optimal decisions. Thus, freezing deposits for some time may be beneficial and help to avoid massive withdrawals as it lengthens response times.
Alfonso Rosa-Garcia
added 2 research items
Thousands of depositors crowd in the door of a bank branch. “Where is our money?” they shout enraged. “We want our money back!” The scene, besides being part of the classic movie “It’s a wonderful life” (Frank Capra, 1946), reflects a reality that many people believed distant but that has re-arisen strongly in recent years. We refer to bank runs.
We report experimental evidence on the effect of observability of actions on bank runs. We model depositors’ decision-making in a sequential framework, with three depositors located at the nodes of a network. Depositors observe the other depositors’ actions only if connected by the network. Theoretically, a sufficient condition to prevent bank runs is that the second depositor to act is able to observe the first one’s action (no matter what is observed). Experimentally, we find that observability of actions affects the likelihood of bank runs, but depositors’ choice is highly influenced by the particular action that is being observed. Depositors who are observed by others at the beginning of the line are more likely to keep their money deposited, leading to less bank runs. When withdrawals are observed, bank runs are more likely even when the mere observation of actions should prevent them.
Alfonso Rosa-Garcia
added 2 research items
We provide experimental evidence that panic bank runs occur in the absence of problems with fundamentals and coordination failures among depositors, the two main culprits identified in the literature. Depositors withdraw when they observe that others do so, even when theoretically they should not. Our findings suggest that panic also manifests itself in the beliefs of depositors, who overestimate the probability that a bank run is underway. Loss-aversion has a predictive power on panic behavior, while risk or ambiguity aversion do not.
Ismael Rodriguez-Lara
added a project goal
We study bank runs as a coordination problem among depositors. We highlight the effects of observability of actions on depositors' behavior. We look at the determinants of bank runs and panic behavior.