A Model of a Systemic Bank Run
AbstractThis paper provides a model of the view that the 2008 financial crisis is reminiscent of a bank run, focusing on six stylized key features. In particular, core financial institutions have invested their funds in asset-backed securities rather than committed to long-term projects: in distress, these can potentially be sold to a large pool of outside investors at steep discounts. I consider two different motives for outside investors and their interaction with banks trading asset-backed securities: uncertainty aversion versus adverse selection. I shall argue that the version with uncertainty averse investors is more consistent with the stylized facts than the adverse selection perspective: in the former, the crisis deepens, the larger the market share of distressed core banks, while a run becomes less likely instead as a result in the adverse selection version. Therefore, the outright purchase of troubled assets by the government at prices above current market prices may both alleviate the financial crises as well as provide tax payers with returns above those for safe securities.
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Bibliographic InfoPaper provided by Becker Friedman Institute for Research In Economics in its series Working Papers with number 2009-006.
Date of creation: Sep 2009
Date of revision:
systemic bank run; bank run; systemic risk; financial crisis; firesale pricing; adverse selection; uncertainty aversion;
Other versions of this item:
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- G01 - Financial Economics - - General - - - Financial Crises
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Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- Repo runs
by Economic Logician in Economic Logic on 2010-05-28 15:10:00
- Weekly Roundup: #80 -The Smartest Linkfest On The Web
by Miguel in Simoleon Sense on 2010-05-30 22:24:05
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