American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Bank Runs and Institutions: The Perils of Intervention
American Economic Review
vol. 99,
no. 4, September 2009
(pp. 1588–1607)
Abstract
We study ex post efficient policy responses to a run on the banking system and the ex ante incentives these responses create. We show that the efficient response to a run is typically not to freeze all remaining deposits, since doing so imposes heavy costs on some individuals. Instead, once a run is underway, (benevolent) government institutions would allow additional deposit withdrawals, placing further strain on the banking system. When depositors anticipate these extra withdrawals, their incentive to participate in the run increases. In fact, ex post efficient interventions can generate the conditions necessary for a self-fulfilling run to occur. (JEL G21, G8)Citation
Ennis, Huberto M., and Todd Keister. 2009. "Bank Runs and Institutions: The Perils of Intervention." American Economic Review, 99 (4): 1588–1607. DOI: 10.1257/aer.99.4.1588JEL Classification
- G21 Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G28 Financial Institutions and Services: Government Policy and Regulation