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

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  • Philippe Madiès

    (Université Pierre Mendès France–Grenoble 2)

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.

Suggested Citation

  • Philippe Madiès, 2006. "An Experimental Exploration of Self-Fulfilling Banking Panics: Their Occurrence, Persistence, and Prevention," The Journal of Business, University of Chicago Press, vol. 79(4), pages 1831-1866, July.
    • Handle: RePEc:ucp:jnlbus:v:79:y:2006:i:4:p:1831-1866
    DOI: 10.1086/503650
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    Cited by:

    1. Xavier Vives, 2014. "Strategic Complementarity, Fragility, and Regulation," The Review of Financial Studies, Society for Financial Studies, vol. 27(12), pages 3547-3592.
    2. Besancenot, Damien & Vranceanu, Radu, 2014. "Experimental evidence on the ‘insidious’ illiquidity risk," Research in Economics, Elsevier, vol. 68(4), pages 315-323.
    3. Damien Besancenot & Radu Vranceanu, 2011. "Experimental Evidence on the 'Insidious' Illiquidity Risk," Post-Print hal-00607867, HAL.
    4. Rajkamal Iyer & Manju Puri, 2012. "Understanding Bank Runs: The Importance of Depositor-Bank Relationships and Networks," American Economic Review, American Economic Association, vol. 102(4), pages 1414-1445, June.
    5. Xavier Vives, 2011. "Competition and Stability in Banking," Central Banking, Analysis, and Economic Policies Book Series, in: Luis Felipe Céspedes & Roberto Chang & Diego Saravia (ed.),Monetary Policy under Financial Turbulence, edition 1, volume 16, chapter 12, pages 455-502, Central Bank of Chile.
    6. 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.
    7. Małgorzata Iwanicz-Drozdowska & Łukasz Kurowski & Bartosz Witkowski, 2023. "Resolution and depositors’ trust empirical analysis of three resolution cases in Poland," Qualitative Research in Financial Markets, Emerald Group Publishing Limited, vol. 16(2), pages 239-265, May.

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