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Understanding Bank-Run Contagion

Author

Listed:
  • Martin Brown

    (University of St. Gallen, 9000 St. Gallen, Switzerland)

  • Stefan T. Trautmann

    (Alfred Weber Institute for Economics, University of Heidelberg, 69115 Heidelberg, Germany; and Department of Economics, Tilburg University, 5037 AB Tilburg, Netherlands)

  • Razvan Vlahu

    (De Nederlandsche Bank (DNB), NL-1000AB Amsterdam, Netherlands)

Abstract

We study experimental coordination games to examine through which transmission channels and under which information conditions a panic-based depositor run at one bank may trigger a panic-based depositor run at another bank. We find that withdrawals at one bank trigger withdrawals at another bank by increasing players’ beliefs that other depositors in their own bank will withdraw, making them more likely to withdraw as well. Observed withdrawals only affect depositors’ beliefs, and are thus contagious when they form an informative signal about bank fundamentals.

Suggested Citation

  • Martin Brown & Stefan T. Trautmann & Razvan Vlahu, 2017. "Understanding Bank-Run Contagion," Management Science, INFORMS, vol. 63(7), pages 2272-2282, July.
    • Handle: RePEc:inm:ormnsc:v:63:y:2017:i:7:p:2272-2282
    DOI: 10.1287/mnsc.2015.2416
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    More about this item

    Keywords

    contagion; bank runs; systemic risk; asset commonality;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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