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Why Do Bank Runs Look Like Panic? A New Explanation

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  • YEHNING CHEN
  • IFTEKHAR HASAN

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 on the bank's fundamentals do not change. More specifically, a bank run may occur when depositors learn that noisy bank-specific information will be revealed, or when they learn that precise bank-specific information will not be revealed. The results in this paper are consistent with the empirical evidence about bank runs. It also implies that suspension of convertibility can improve the efficiency of bank runs. Copyright (c)2008 The Ohio State University.

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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 40 (2008)
Issue (Month): 2-3 (03)
Pages: 535-546

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Handle: RePEc:mcb:jmoncb:v:40:y:2008:i:2-3:p:535-546

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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References

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  1. Hasan, Iftekhar & Dwyer, Gerald P, Jr, 1994. "Bank Runs in the Free Banking Period," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(2), pages 271-88, May.
  2. Gerald P. Dwyer, Jr. & Iftekhar Hasan, 1996. "Suspension of payments, bank failures, and the nonbank public's losses," Working Paper 96-3, Federal Reserve Bank of Atlanta.
  3. Calomiris, Charles W., 1990. "Is Deposit Insurance Necessary? A Historical Perspective," The Journal of Economic History, Cambridge University Press, vol. 50(02), pages 283-295, June.
  4. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  5. Chen, Yehning & Hasan, Iftekhar, 2006. "The transparency of the banking system and the efficiency of information-based bank runs," Journal of Financial Intermediation, Elsevier, vol. 15(3), pages 307-331, July.
  6. V.V. Chari & Ravi Jagannathan, 1984. "Banking Panics," Discussion Papers 618, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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Citations

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Cited by:
  1. Topi, Jukka, 2008. "Bank runs, liquidity and credit risk," Research Discussion Papers 12/2008, Bank of Finland.
  2. Mälkönen, Ville & Niinimäki, J.-P., 2012. "Blanket guarantee, deposit insurance and restructuring decisions for multinational banks," Journal of Financial Stability, Elsevier, vol. 8(2), pages 84-95.
  3. Gande, Amar & John, Kose & Senbet, Lemma W., 2008. "Bank incentives, economic specialization, and financial crises in emerging economies," Journal of International Money and Finance, Elsevier, vol. 27(5), pages 707-732, September.
  4. Moreno, Diego & Takalo , Tuomas, 2012. "Optimal bank transparency," Research Discussion Papers 9/2012, Bank of Finland.
  5. Niinimäki, Juha-Pekka & Mälkönen, Ville, 2009. "Blanket guarantee and restructuring decisions for multinational banks in a bargaining model," Research Discussion Papers 16/2009, Bank of Finland.
  6. Itai Agur, 2009. "What Institutional Structure for the Lender of Last Resort?," DNB Working Papers 200, Netherlands Central Bank, Research Department.
  7. Niinimaki, J.-P., 2012. "Hidden loan losses, moral hazard and financial crises," Journal of Financial Stability, Elsevier, vol. 8(1), pages 1-14.
  8. Semenova, M., 2011. "Bank Runs and Costly Information," Journal of the New Economic Association, New Economic Association, issue 10, pages 31-52.
  9. Hasman, Augusto & López, Ángel L. & SamartIín, Margarita, 2011. "Government, taxes and banking crises," Journal of Banking & Finance, Elsevier, vol. 35(10), pages 2761-2770, October.

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