Bank Runs and Institutions: The Perils of Intervention

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...

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Bibliographic Details
Published in:The American economic review 2009-09, Vol.99 (4), p.1588-1607
Main Authors: Ennis, Huberto M., Keister, Todd
Format: Article
Language:English
Subjects:
Bank assets
Bank deposits
Bank failures
Bank liquidity
Banking
Banking crises
Banking panics
Banking system
Banks
Central banks
Cost control
Deposit insurance
Economic policy
Efficiency
Federal Reserve Bank
Financial crisis
Financial economics
Freezing
Institutionalism
Intervention
Panic
Payments
Risk aversion
Shorter Papers
Studies
Withdrawals
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Summary: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. (JEL G21, G8)
ISSN:0002-8282
1944-7981
DOI:10.1257/aer.99.4.1588