Bank Runs Without Sequential Service

35 Pages Posted: 13 Aug 2018 Last revised: 21 Feb 2019

See all articles by David Andolfatto

David Andolfatto

Simon Fraser University (SFU) - Department of Economics; Federal Reserve Bank of St. Louis

Ed Nosal

Federal Reserve Banks - Federal Reserve Bank of Atlanta

Multiple version iconThere are 2 versions of this paper

Date Written: 2018-07

Abstract

Banking models in the tradition of Diamond and Dybvig (1983) rely on sequential service to explain belief driven runs. But the run-like phenomena witnessed during the financial crisis of 2007-08 occurred in the wholesale shadow banking sector where sequential service is largely absent. This suggests that something other than sequential service is needed to help explain runs. We show that in the absence of sequential service runs can easily occur whenever bank-funded investments are subject to increasing returns to scale consistent with available evidence. Our framework is used to understand and evaluate recent banking and money market regulations.

JEL Classification: G01, G21, G28

Suggested Citation

Andolfatto, David and Nosal, Ed, Bank Runs Without Sequential Service (2018-07). FRB St. Louis Working Paper No. 2018-16. Available at SSRN: https://ssrn.com/abstract=3229491 or http://dx.doi.org/doi.org/10.20955/wp.2018.016

David Andolfatto (Contact Author)

Simon Fraser University (SFU) - Department of Economics ( email )

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Ed Nosal

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

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