Asset-side Bank Runs and Liquidity Rationing: A Vicious Cycle

44 Pages Posted: 6 Nov 2020 Last revised: 8 Aug 2023

See all articles by Zongbo Huang

Zongbo Huang

The Chinese University of Hong Kong, Shenzhen - School of Management and Economics and Shenzhen Finance Institute

Date Written: October 24, 2020

Abstract

I analyze runs on credit lines in an infinite-horizon banking model, focusing on the strategic complementarity between bankers and credit line borrowers. Panic drawdowns by borrowers and bank liquidity rationing can reinforce each other, creating a vicious cycle. Using data from U.S. banks, I estimate the model and quantify the amplification effect arising from strategic complementarity. This amplification effect accounted for two-thirds of the contraction of total bank credit during the 2008-2009 crisis. Moreover, I show that policies targeting borrowers have a crowding-in effect and can effectively contain credit contraction.

Keywords: Credit lines, liquidity rationing, strategic complementarity, amplification channel.

JEL Classification: E44, E50, G01, G21, G28

Suggested Citation

Huang, Zongbo, Asset-side Bank Runs and Liquidity Rationing: A Vicious Cycle (October 24, 2020). Available at SSRN: https://ssrn.com/abstract=3718144 or http://dx.doi.org/10.2139/ssrn.3718144

Zongbo Huang (Contact Author)

The Chinese University of Hong Kong, Shenzhen - School of Management and Economics and Shenzhen Finance Institute ( email )

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