Why do Bank Runs Look Like Panic? A New Explanation

25 Pages Posted: 16 Oct 2007

See all articles by Yehning Chen

Yehning Chen

National Taiwan University

Iftekhar Hasan

Fordham University - Gabelli School of Business; Bank of Finland

Date Written: 2006

Abstract

This paper demonstrates that, even if depositors are fully rational and always choose the Pareto dominant equilibrium when there are multiple equilibria, a bank run may still occur when depositors' expectations of the bank's fundamentals do not change. More specifically, a bank run may occur when depositors learn that noisy bank-specific information is revealed, or when they learn that precise bank-specific information is not revealed. The results in this paper are consistent with empirical evidence about bank runs. It also implies that suspension of convertibility can improve the efficiency of bank runs.

Keywords: bank run, banking panic, suspension of convertibility

JEL Classification: G21, G28

Suggested Citation

Chen, Yehning and Hasan, Iftekhar, Why do Bank Runs Look Like Panic? A New Explanation (2006). Bank of Finland Research Discussion Paper No. 19/2006. Available at SSRN: https://ssrn.com/abstract=1019951 or http://dx.doi.org/10.2139/ssrn.1019951

Yehning Chen

National Taiwan University ( email )

1 Sec. 4, Roosevelt Road
Taipei, 106
Taiwan

Iftekhar Hasan (Contact Author)

Fordham University - Gabelli School of Business ( email )

Rose Hill Campus Bronx
New York, NY 10458
United States

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

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