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An Experimental Exploration of Self-Fulfilling Banking Panics: Their Occurrence, Persistence, and Prevention

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  • Philippe Madi�s

    (Université Pierre Mendès France–Grenoble 2)

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    Abstract

    This article tests the possibility and the degree of persistence of self-fulfilling banking panics through an experimental protocol. Panics are proved to be persistent phenomena that are difficult to prevent. However, it seems possible to curb them through a learning effect caused by a temporary but sufficient suspension of the deposit availability, combined with a "narrow-banking" solution, which makes banks more liquid. Additionally, panic prevention requires a full deposit coverage to be effective. This suggests that the moral-hazard issue should not be tackled through a lower deposit coverage, especially in emerging countries' banking systems where depositors are likely to lose confidence.

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    Bibliographic Info

    Article provided by University of Chicago Press in its journal Journal of Business.

    Volume (Year): 79 (2006)
    Issue (Month): 4 (July)
    Pages: 1831-1866

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    Handle: RePEc:ucp:jnlbus:v:79:y:2006:i:4:p:1831-1866

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    Web page: http://www.journals.uchicago.edu/JB/

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    Cited by:
    1. Xavier Vives, 2011. "Strategic Complementarity, Fragility, and Regulation," CESifo Working Paper Series 3507, CESifo Group Munich.
    2. Xavier Vives, 2010. "Competition and Stability in Banking," Working Papers Central Bank of Chile 576, Central Bank of Chile.
    3. Trautmann, Stefan T. & Vlahu, Razvan, 2013. "Strategic loan defaults and coordination: An experimental analysis," Journal of Banking & Finance, Elsevier, vol. 37(3), pages 747-760.
    4. repec:hal:cepnwp:halshs-00602107 is not listed on IDEAS
    5. Vranceanu, Radu & Besancenot, Damien, 2011. "Experimental Evidence on the ‘Insidious’ Illiquidity Risk," ESSEC Working Papers WP1107, ESSEC Research Center, ESSEC Business School.
    6. Rajkamal Iyer & Manju Puri, 2008. "Understanding Bank Runs: The Importance of Depositor-Bank Relationships and Networks," NBER Working Papers 14280, National Bureau of Economic Research, Inc.

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