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

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