Contagious Bank Runs and Committed Liquidity Support

58 Pages Posted: 2 Feb 2021 Last revised: 10 Mar 2021

See all articles by Zhao Li

Zhao Li

University of International Business and Economics (UIBE) - School of Banking and Finance

Kebin Ma

University of Warwick - Finance Group

Date Written: December 30, 2020

Abstract

In a crisis, regulators and private investors can find it difficult, if not impossible, to tell whether banks facing runs are insolvent or merely illiquid. We introduce such an information constraint into a global-games-based bank run model with multiple banks and aggregate uncertainties. The information constraint creates a vicious cycle between contagious bank runs and falling asset prices and limits the effectiveness of traditional emergency liquidity assistance programs. We explain how a regulator can set up committed liquidity support to contain contagion and stabilize asset prices even without information on banks' solvency, rationalizing some recent developments in policy practices.

Keywords: Committed liquidity support, Global games, Bank runs

JEL Classification: G01, G11, G21

Suggested Citation

Li, Zhao and Ma, Kebin, Contagious Bank Runs and Committed Liquidity Support (December 30, 2020). WBS Finance Group Research Paper Series no 230, Available at SSRN: https://ssrn.com/abstract=3777157 or http://dx.doi.org/10.2139/ssrn.3777157

Zhao Li

University of International Business and Economics (UIBE) - School of Banking and Finance ( email )

No.10, Huixindong Street
Chaoyang District
Beijing, 100029
China

Kebin Ma (Contact Author)

University of Warwick - Finance Group ( email )

Gibbet Hill Rd
Coventry, CV4 7AL
Great Britain

HOME PAGE: http://www.kebinma.com

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
20
Abstract Views
139
PlumX Metrics