Research Discussion Papers, Bank of Finland
No 10/2015:
Why are bank runs sometimes partial?
Ilkka Kiema ()
and Esa Jokivuolle ()
Abstract: Concern that government may not guarantee bank deposits in
a future crisis can cause a bank run. The government may break its
guarantee during a severe crisis because of time-inconsistent preferences
regarding the use of public resources. However, as deposits are with-drawn
during the bank run, the size of the government’s liability to guarantee
the remaining deposits is gradually reduced, which increases the
government’s incentive to provide the promised guarantee. This in turn
reduces depositors’ incentive to withdraw, which may explain why bank runs
sometimes remain partial. Our model yields an endogenously determined
probability and size of a partial bank run. These depend on a common signal
as to the future state of the economy, the cost of liquidity provision to
banks, and the government’s reputational cost of breaking the deposit
guarantee. We apply the model to a multi-country deposit insurance scheme,
an idea that has been aired in the context of the European Banking
Union.
Keywords: bank crises; information induced bank runs; deposit guarantee; bank regulation; (follow links to similar papers)
JEL-Codes: G21; G28; (follow links to similar papers)
51 pages, April 9, 2015
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