Bank Runs, Welfare and Policy Implications
35 Pages Posted: 13 Dec 2005
Date Written: April 2002
This paper proposes a model in which bank runs are closely related to the state of the business cycle. The benchmark model shows that, in a market economy, there are welfare losses due to the existence of bank runs. Extensions of the model explore the welfare effects of various government policies. The results suggest that an interest-cap deposit insurance scheme is an efficient policy to prevent bank runs, while other policies, including the suspension of convertibility, a penalty on short-term deposits and full-coverage deposit insurance schemes, will all have adverse side effects.
Keywords: Bank runs, Financial crisis, Bank regulation, Suspension of convertibility, Deposit insurance, Reserve requirement, Capital requirement
JEL Classification: G21, G28, E53
Suggested Citation: Suggested Citation