Bank Runs and Institutions: The Perils of Intervention

30 Pages Posted: 9 Dec 2012

See all articles by Huberto M. Ennis

Huberto M. Ennis

Federal Reserve Banks - Federal Reserve Bank of Richmond

Todd Keister

Rutgers, The State University of New Jersey - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: March 30, 2007

Abstract

Governments typically respond to a run on the banking system by temporarily freezing deposits and by rescheduling payments to depositors. Depositors may even be required to demonstrate an urgent need for funds before being allowed to withdraw. We study ex post efficient policy responses to a bank run and the ex ante incentives these responses create. Given that a run is underway, the efficient response is typically not to freeze all remaining deposits, since this would impose heavy costs on individuals with urgent withdrawal needs. Instead, (benevolent) government institutions would allow additional withdrawals, creating further strain on the banking system. We show that when depositors anticipate these extra withdrawals, their incentives to participate in the run actually increase. In fact, ex post efficient interventions can generate the conditions necessary for a self-fulfilling run to occur.

Suggested Citation

Ennis, Huberto M. and Keister, Todd, Bank Runs and Institutions: The Perils of Intervention (March 30, 2007). FRB Richmond Working Paper No. 07-02. Available at SSRN: https://ssrn.com/abstract=2186651 or http://dx.doi.org/10.2139/ssrn.2186651

Huberto M. Ennis (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

Todd Keister

Rutgers, The State University of New Jersey - Department of Economics ( email )

75 Hamilton Street
New Brunswick, NJ 08901
United States

HOME PAGE: http://econweb.rutgers.edu/tkeister

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