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

39 Pages Posted: 6 Nov 2020 Last revised: 20 Oct 2021

See all articles by Zongbo Huang

Zongbo Huang

The Chinese University of Hong Kong, Shenzhen

Date Written: October 24, 2020

Abstract

I study an infinite-horizon banking model with asset-side runs on credit lines. Strategic complementarity between bankers and credit line borrowers arises from contract contingency and the bank balance sheet channel: borrowers' panic drawdowns and bankers' liquidity rationing reinforce each other, leading to a vicious cycle. Using data from U.S. banks, I estimate the model and quantify the amplification effect of the strategic complementarity. This amplification mechanism accounts for a quarter of the overall liquidity shortfalls during the 2008-09 crisis.

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 ( email )

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