Bank Run

We introduce banks, modeled as in Diamond and Rajan (JoF 2000 or JPE 2001), into a standard DSGE model and use this framework to study the role of banks in the transmission of shocks, the effects of monetary policy when banks are exposed to runs, and the interplay between monetary policy and Basel-like capital ratios. In equilibrium, bank leverage depends

The purpose of this paper is to examine narrow banking proposals. First, we survey the narrow banking proposals presented in the United States and Japan, and categorize them by means of two standards: (1) whether safe assets that a narrow bank is allowed to hold are limited ...

The simple answer to both questions in the title of this paper: No. We concentrate on three key aspects of the banking system’s difficulties during the 2001–02 crisis. Two are related to bank behavior (increasing dollarization of the balance sheet and expanding exposure to the government), and the other is related to the degree by which banks were hurt by depositor preferences, specifically, the run on deposits during 2001. We find that there was substantial cross-bank variation, that is, not all banks behaved equally nor were hurt equally by the macroeconomic shocks they faced during the run-up to the crisis. Furthermore, using panel data estimation, we find that depositors were able to distinguish high-risk from low-risk banks, and that individual bank’s exposure to currency and government default risk depended on fundamentals and other bank-specific characteristics. Finally, our results have implications for the existence of market discipline in periods of stress, and for banking...

In this paper contagious risks and financial crises are endogenized through the interactions among corporations, banks, and the interbank market. We show that the lack of financial discipline in a single-bank-financing economy generates informational problems and thus the malfunction of the interbank market, which constitutes a mechanism of financial contagion and may lead to a financial crisis. In contrast, financial discipline in an economy with diversified financial institutions leads to timely information disclosure from firms to banks and improves the informational environment of the interbank market. With symmetric information in the interbank market, bank runs are contained to insolvent banks and financial crises are prevented. Our theory sheds light on the causes and timing of the East Asian crisis; it also has important policy implications for the lender of last resort and banking reform.

... Saunders and Wilson 119951 term the resulting positive relationship between bank capital and charter value the" charter value hypothesis." Keeley 119901 provides evidence linking declining capital ratios to declining US bank charter values since the 1960s, which, in turn ...

Using aggregate and bank-level data for several countries, the paper studies what happens to the banking system following a banking crisis. Crises are not accompanied by a significant decline in aggregate bank deposits relative to GDP, although depositors leave weaker banks for stronger ones. Credit slows substantially, but the credit-to-GDP ratio is higher after the crisis. Output recovery begins in the second year after the crisis while credit still stagnates. Banks, including healthier ones, reallocate their asset portfolio away from loans, suggesting a lack of loan demand or collateral. Banks also improve their cost efficiency.

In a theoretical framework where liquidity crises are not only caused by bank runs, and where there is uncertainty about the proportion of depositors who may want to withdraw deposits, we show that abandoning the hypothesis of a representative bank (as in Diamond and ...

In autumn of 2007 Britain experienced its first bank run of any significance since the reign of Queen Victoria. The run was on a bank called Northern Rock. This was extraordinary, for Britain had been free of such episodes because by early in the third quarter of the 19th century the Bank of England had developed techniques to prevent them.

We study financial fragility, exchange rate crises, and monetary policy in a model of an open economy with Diamond–Dybvig banks. The banking system, the exchange rate regime, and central bank credit policy are seen as parts of a mechanism intended to maximize social welfare; if the mechanism fails, banking crises and speculative attacks on the currency become possible. We compare currency boards, fixed rates, and flexible rates, with and without a lender of last resort. A currency board cannot implement a social optimum; in addition, it allows bank runs to occur. A fixed exchange rate system may implement the social optimum but is more prone to bank runs and exchange rate crises than a currency board. A flexible rate system implements the social optimum and eliminates runs, provided that the exchange rate and credit policies of the central bank are appropriately designed. Journal of Economic Literature Classification Numbers: F3, E5, G2.

We experimentally examine equilibrium selection concepts in static and dynamic binary choice games of complete information with strategic complementarities known as "entry" games. Examples include speculative attacks, bank runs and refinancing decisions by multiple lenders. We explore behavior in entry games of complete information, where the value of a state variable is known to all players in advance of making

I studied the effect of banking concentration on bank runs using the theoretical framework of Diamond and Dybvig ( 1983), and others. When banks have market power they are more prone to run in cases of low long-term return rates. Under asymmetric information about the quality of banks, depositors can discriminate them according the concentration level. In that way, there exists a threshold for concentration where the bank is identified as a good bank, if it is under the threshold and as a bad bank if it is over the threshold. Data for 54 countries between 1990 and 2003 confirm the existence of warning zones in which the relationship between probability of run and concentration is not linear. On the other hand, in most of the cases, there is a negative correlation between deposit rates and concentration.

This paper develops a simple model of precautionary foreign reserves in a dollari- zed economy subject to a sudden stop shock that occurs concurrently with a bank run. By including specific features of the Croatian economy in our model we extend the fra- mework of Goncalves (2007). An analytical expression of optimal reserves is derived and calibrated for Croatia in order to evaluate the adequacy of the Croatian National Bank foreign reserves. We show that the precautionary demand for reserves is consistent with the trend of the strong accumulation of foreign reserves over the last ten years. Whether this trend has been too strong or whether the actual reserves are lower than the optimal reserves depends on the possible reaction of the parent banks during a crisis. We show that for plausible values of parameters, the Croatian National Bank has enough reserves to fight a possible crisis of the magnitude of the 1998/1999 sudden stop with a banking crisis episode. This result holds reg...