BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
No 2/2002:
Bank panics in transition economies
Juha-Pekka Niinimäki ()
Abstract: This paper discusses recent bank runs in seven transition
economies (Russia, Bulgaria, Estonia, Hungary, Latvia, Lithuania and
Romania), comparing them against the older US experience and theoretical
research. Bank runs seem to usually be information based. For example,
improvements in bank transparency such as new accounting rules can reveal a
bank’s insolvency and trigger a run. However, bank runs, as seen a few
years ago in East Asia, Bulgaria and Russia, may also be accompanied by
runs on national currencies. We include a bank run model that shows a bank
may issue liquid demand deposits and avoid runs without deposit insurance
as long as it also issues less liquid time deposits. Self-fulfilling runs
are prevented through elimination of the maturity mismatch. The well-known
Diamond & Dybvig (1983) model is modified to account for depositors’ risk
affinities, whereby high-risk depositors hold their savings as demand
deposits and low-risk depositors prefer time deposits. These deposit
choices transfer liquidity optimally from low-risk to high-risk depositors
who value liquidity. By exploiting these choices, a bank can improve its
intertemporal risk-sharing by issuing deposits of varying degrees of
liquidity. This maturity transformation does not necessarily raise the
economy’s total liquidity.
Keywords: ansition economies; bank panics; bank regulation; financial crises; (follow links to similar papers)
44 pages, February 27, 2002
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