Research Discussion Papers, Bank of Finland
Yehning Chen and Iftekhar Hasan
Why do bank runs look like panic? A new explanation
Abstract: This paper demonstrates that, even if depositors are fully
rational and always choose the Pareto dominant equilibrium when there are
multiple equilibria, a bank run may still occur when depositors’
expectations of the bank’s fundamentals do not change. More specifically, a
bank run may occur when depositors learn that noisy bank-specific
information is revealed, or when they learn that precise bank-specific
information is not revealed. The results in this paper are consistent with
empirical evidence about bank runs. It also implies that suspension of
convertibility can improve the efficiency of bank runs.
Keywords: bank run; banking panic; suspension of convertibility; (follow links to similar papers)
JEL-Codes: G21; G28; (follow links to similar papers)
25 pages, September 27, 2006
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