Bank Runs and Institutions: The Perils of Intervention

Ennis, Huberto M.; Keister, Todd

doi:10.1257/aer.99.4.1588

Cited by 225 publications

(111 citation statements)

References 38 publications

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“…In the Tough design a hold 20. We emphasize, however, that our Tough treatment is distinct from the notion of nonfragility proposed by Ennis and Keister (2009), for example, that the per capita liquidation value of all assets exceeds the original payment for withdrawal. In this sense, nonfragility essentially requires that the bank provides no liquidity insurance.…”

Section: The Simultaneous Regimementioning

confidence: 85%

On Freezing Depositor Funds at Financially Distressed Banks: An Experimental Analysis

Davis¹,

Reilly²

2016

J of Money Credit Banking

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This article reports an experiment conducted to evaluate the effects of alterations in the terms of repayments to depositors following a liquidity suspension, as well as the effect of alterations in the publicity of information about withdrawal behavior on the fragility of distressed banks. Results indicate that a “tough” renegotiation stance of protecting depositors who maintain their money in the bank, can quite effectively promote stability. Information provided to depositors regarding past withdrawal behavior weakens the effectiveness of a tough renegotiation policy but reduces fragility somewhat for a more lenient rescheduling condition.

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Section: The Simultaneous Regimementioning

confidence: 85%

On Freezing Depositor Funds at Financially Distressed Banks: An Experimental Analysis

Davis¹,

Reilly²

2016

J of Money Credit Banking

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show abstract

“…[15]; [16]). A notable exception is [17] who suppose that depositors decide after each other according to a predetermined order and they observe all previous choices before making decision.…”

Section: Related Literaturementioning

confidence: 99%

Correlated Observations, the Law of Small Numbers and Bank Runs

Horváth

Kiss

2014

SSRN Journal

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Empirical descriptions and studies suggest that generally depositors observe a sample of previous decisions before deciding if to keep their funds deposited or to withdraw them. These observed decisions may exhibit different degrees of correlation across depositors. In our model depositors decide sequentially and are assumed to follow the law of small numbers in the sense that they believe that a bank run is underway if the number of observed withdrawals in their sample is large. Theoretically, with highly correlated samples and infinite depositors runs occur with certainty, while with random samples it needs not be the case, as for many parameter settings the likelihood of bank runs is zero. We investigate the intermediate cases and find that i) decreasing the correlation and ii) increasing the sample size reduces the likelihood of bank runs, ceteris paribus. Interestingly, the multiplicity of equilibria, a feature of the canonical Diamond-Dybvig model that we use also, disappears almost completely in our setup. Our results have relevant policy implications.

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“…Ennis and Keister (2009) shows that complete suspension of convertibility is not ex post efficient and thus not an ex ante credible commitment. It may not necessarily reduce the chance of runs.18 Suppose there are some negligible costs of diffusion, the borrower will only divide the group size into α to exactly avoid any bank runs.…”

mentioning

confidence: 99%

Diffusing Coordination Risk

Basak

Zhou

2020

American Economic Review

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This paper designs an optimal mechanism to correct coordination failure. A planner wants her agents to coordinate on a cooperative action. Agents gather noisy private information regarding the underlying fundamental and decide whether to cooperate or not. The global game literature uniquely identifies the chance of coordination failure when the coordination risk is concentrated at one point in time. We analyze the case when the planner diffuses the coordination risk over time. The planner approaches the agents sequentially -only a proportion of agents at a time and advancing further only when the coordination failure has been averted so far. The public information of survival works as a coordination device and helps in mitigating the coordination risk. We show that if the planner can diffuse the coordination risk enough, then she can achieve the first best as the unique equilibrium outcome. However, if the planner has only limited power to diffuse the coordination risk, multiple equilibria can arise. A maxmin planner should diffuse the coordination risk as much as possible. We also show that if some groups are more reluctant to cooperate than others, a max-min planner should approach the more reluctant groups first. Our mechanism is robust to various generalizations and can be applied to a wide range of coordination games. * We are extremely grateful to Douglas Gale and David Pearce for their substantial guidance and support throughout this project. We thank Viral Acharya, Jess Benhabib, Itay Goldstein, Zhiguo He, Laurent Mathevet, Cecilia Parlatore, Ennio Stacchetti, Laura Veldkamp, Neil Wallace for helpful comments and suggestions.

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Bank Runs and Institutions: The Perils of Intervention

Cited by 225 publications

References 38 publications

On Freezing Depositor Funds at Financially Distressed Banks: An Experimental Analysis

On Freezing Depositor Funds at Financially Distressed Banks: An Experimental Analysis

Correlated Observations, the Law of Small Numbers and Bank Runs

Diffusing Coordination Risk

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