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Herd Behavior, Bank Runs and Information Disclosure

38 Pages Posted: 13 Sep 2004  

Tanju Yorulmazer

University of Amsterdam - Faculty of Economics and Business (FEB)

Date Written: May 21, 2003


I develop a dynamic model of bank runs that allows me to study important phenomena such as the role of information externalities and herd behavior of depositors as a source of bank runs. I show that eliminating bank runs completely, even they can be generated by herd behavior of depositors, has costs. Furthermore, a deposit contract that allows for runs can achieve higher levels of depositor welfare than a contract that completely eliminates them. Since early liquidation of bank's assets is costly, a central bank that acts as a lender of last resort alleviates some of the costs associated with bank runs. Yet it cannot prevent runs on healthy banks in the absence of perfect information about the bank's asset quality. In those cases, a deposit contract, even with liquidity support from the central bank, cannot achieve the first best efficient outcome. As a policy measure, any efforts to give market discipline a stronger role in achieving financial stability should be accompanied by transparency and disclosure of information on banks' soundness and management of the crisis.

Keywords: Herding, bank runs, information, disclosure

JEL Classification: G22, D83, D84, G29

Suggested Citation

Yorulmazer, Tanju, Herd Behavior, Bank Runs and Information Disclosure (May 21, 2003). Available at SSRN: or

Tanju Yorulmazer (Contact Author)

University of Amsterdam - Faculty of Economics and Business (FEB) ( email )

Roetersstraat 11
Amsterdam, 1018 WB

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