Understanding Bank Runs: the Importance of Depositor-Bank Relationships and Networks

47 Pages Posted: 1 Sep 2008 Last revised: 10 Jul 2010

See all articles by Rajkamal Iyer

Rajkamal Iyer

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Manju Puri

Duke University - Fuqua School of Business; NBER; FDIC

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Date Written: August 2008

Abstract

We use a unique, new, database to examine micro depositor level data for a bank that faced a run. We use minute-by-minute depositor withdrawal data to understand the effectiveness of deposit insurance, the role of social networks, and the importance of bank-depositor relationships in influencing depositor propensity to run. We employ methods from the epidemiology literature which examine how diseases spread to estimate transmission probabilities of depositors running, and the significant underlying factors. We find that deposit insurance is only partially effective in preventing bank runs. Further, our results suggest that social network effects are important but are mitigated by other factors, in particular the length and depth of the bank-depositor relationship. Depositors with longer relationships and those who have availed of loans from a bank are less likely to run during a crisis, suggesting that cross-selling acts not just as a revenue generator but also as a complementary insurance mechanism for the bank. Finally, we find there are long term effects of a solvent bank run in that depositors who run do not return back to the bank. Our results help understand the underlying dynamics of bank runs and hold important policy implications.

Suggested Citation

Iyer, Rajkamal and Puri, Manju, Understanding Bank Runs: the Importance of Depositor-Bank Relationships and Networks (August 2008). NBER Working Paper No. w14280. Available at SSRN: https://ssrn.com/abstract=1261467

Rajkamal Iyer

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

Manju Puri (Contact Author)

Duke University - Fuqua School of Business ( email )

100 Fuqua Drive
Box 90120
Durham, NC 27708-0120
United States
919-660-7657 (Phone)

NBER

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

FDIC ( email )

550 17th Street NW
Washington, DC 20429
United States

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