Bank Runs and Investment Decisions Revisited

Posted: 16 Feb 2013

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: 2006

Abstract

We examine how the possibility of a bank run affects the investment decisions made by a competitive bank. Cooper and Ross (1998, Bank runs: liquidity costs and investment distortions. Journal of Monetary Economics 41, 27–38) have shown that when the probability of a run is small, the bank will offer a contract that admits a bank-run equilibrium. We show that, in this case, the bank will chose to hold an amount of liquid reserves exactly equal to what withdrawal demand will be if a run does not occur; precautionary or ‘‘excess’’ liquidity will not be held. This result allows us to show that when the cost of liquidating investment early is high, an increase in the probability of a run will lead the bank to invest less. However, when liquidation costs are moderate, the level of investment is increasing in the probability of a run.

Keywords: banking panics, liquidity, investment

JEL Classification: G21, E44

Suggested Citation

Ennis, Huberto M. and Keister, Todd, Bank Runs and Investment Decisions Revisited (2006). Journal of Monetary Economics, Vol. 53, 2006. Available at SSRN: https://ssrn.com/abstract=2218568

Huberto M. Ennis

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

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

Todd Keister (Contact Author)

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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