The Welfare Costs of Self-Fulfilling Bank Runs

Journal of Money, Credit and Banking, Forthcoming

50 Pages Posted: 8 Apr 2020

See all articles by Elena Mattana

Elena Mattana

Aarhus University

Ettore Panetti

University of Naples Federico II - Department of Economic and Statistical Sciences; UECE - Research Unit on Complexity in Economics; SUERF - The European money and finance forum

Date Written: March 13, 2020

Abstract

We study the welfare implications of self-fulfilling bank runs and liquidity requirements, in a growth model where banks, facing persistent possible runs, can choose in any period a run-proof asset portfolio. In this framework, runs distort banks’ insurance provision against idiosyncratic shocks, and liquidity requirements resolve this distortion at the cost of a credit tightening. Quantitatively, the welfare costs of self-fulfilling bank runs are equivalent to a constant consumption loss of up to 2.3 percent of U.S. GDP. Liquidity requirements might increase these welfare costs by up to 2.4 percent.

Keywords: financial intermediation, self-fulfilling bank runs, welfare, regulation

JEL Classification: E21, E44, G01, G20

Suggested Citation

Mattana, Elena and Panetti, Ettore, The Welfare Costs of Self-Fulfilling Bank Runs (March 13, 2020). Journal of Money, Credit and Banking, Forthcoming , Available at SSRN: https://ssrn.com/abstract=3553876

Elena Mattana

Aarhus University ( email )

Nordre Ringgade 1
Aarhus, 8000
Denmark

Ettore Panetti (Contact Author)

University of Naples Federico II - Department of Economic and Statistical Sciences ( email )

Via Cintia 26
Napoli
Italy

HOME PAGE: http://https://sites.google.com/view/ettorepanetti/home

UECE - Research Unit on Complexity in Economics ( email )

ISEG/UTL, Rua Miguel Lupi 20
Lisboa, 1249-078
Portugal

SUERF - The European money and finance forum ( email )

PO Box 98
Amsterdam, 1000AB
Netherlands

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