Understanding Bank-Run Contagion

We study experimental coordination games to examine through which transmission channels and under which information conditions a panic-based depositor run at one bank may trigger a panic-based depositor run at another bank. We find that withdrawals at one bank trigger withdrawals at another bank by...

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Bibliographic Details
Published in:Management science 2017-07, Vol.63 (7), p.2272-2282
Main Authors: Brown, Martin, Trautmann, Stefan T., Vlahu, Razvan
Format: Article
Language:English
Subjects:
asset commonality
Bank deposits
Bank runs
Banks
Causes of
Contagion
Coordination
Financial risk
Games
Management research
Social aspects
systemic risk
Withdrawals
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Summary:We study experimental coordination games to examine through which transmission channels and under which information conditions a panic-based depositor run at one bank may trigger a panic-based depositor run at another bank. We find that withdrawals at one bank trigger withdrawals at another bank by increasing players’ beliefs that other depositors in their own bank will withdraw, making them more likely to withdraw as well. Observed withdrawals only affect depositors’ beliefs, and are thus contagious when they form an informative signal about bank fundamentals. Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2015.2416 . This paper was accepted by Amit Seru, finance .
ISSN:0025-1909
1526-5501
DOI:10.1287/mnsc.2015.2416