Savings, Efficiency and the Nature of Bank Runs

39 Pages Posted: 12 Jan 2022

See all articles by Agnese Leonello

Agnese Leonello

European Central Bank, Financial Research Division

Caterina Mendicino

European Central Bank (ECB) - Directorate General Research

Ettore Panetti

University of Naples Federico II, CSEF - Center for Studies in Economics and Finance, Students; UECE - Research Unit on Complexity in Economics; SUERF - The European money and finance forum; CSEF - University of Naples Federico II - Centre for Studies in Economics and Finance (CSEF)

Davide Porcellacchia

European Central Bank (ECB)

Date Written: January, 2022

Abstract

Does the level of deposits matter for bank fragility and efficiency? In a banking model with endogenous bank runs and a consumption-saving decision, we show that the level of deposits has opposite effects on bank fragility depending on the nature of bank runs. In an economy with panic-driven runs, higher deposits make banks less fragile, while the opposite is true when runs are only driven by fundamentals. The effect of deposits is not internalized by depositors. A saving externality arises, leading to excessive fragility and insufficient liquidity provision. The economy features under-saving when runs are panic driven, and over-saving when fundamental driven.

Keywords: endogenous bank runs, fundamental runs, liquidity provision, panic runs, saving externality

JEL Classification: G01, G21, G28

Suggested Citation

Leonello, Agnese and Mendicino, Caterina and Panetti, Ettore and Porcellacchia, Davide, Savings, Efficiency and the Nature of Bank Runs (January, 2022). ECB Working Paper No. 2022/2636, Available at SSRN: https://ssrn.com/abstract=4006854 or http://dx.doi.org/10.2139/ssrn.4006854

Agnese Leonello (Contact Author)

European Central Bank, Financial Research Division ( email )

Caterina Mendicino

European Central Bank (ECB) - Directorate General Research ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

Ettore Panetti

University of Naples Federico II, CSEF - Center for Studies in Economics and Finance, Students ( email )

Via Cintia
Complesso Monte S. Angelo
Naples, 80126
Italy

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

CSEF - University of Naples Federico II - Centre for Studies in Economics and Finance (CSEF) ( email )

Via Cintia
Complesso Monte S. Angelo
Naples, Naples 80126
Italy

Davide Porcellacchia

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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