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Savings, efficiency and bank runs

Author

Listed:
  • Leonello, Agnese
  • Mendicino, Caterina
  • Panetti, Ettore
  • Porcellacchia, Davide

Abstract

Does the level of deposits matter for bank fragility and efficiency? By augmenting a standard model of endogenous bank runs with a consumption-saving decision, we obtain two novel results. First, depositors’ incentives to run are a function of the level of savings held as bank deposits. Second, a saving externality emerges in that individual depositors do not internalize the effect of their saving decisions on the bank-run probability. As a result, the economy features an inefficient level of savings and bank liquidity provision as well as excessive bank fragility. These results are robust to different sources of bank fragility, as they emerge both when runs are panic- and fundamental-driven. JEL Classification: G01, G21, G28

Suggested Citation

  • Leonello, Agnese & Mendicino, Caterina & Panetti, Ettore & Porcellacchia, Davide, 2022. "Savings, efficiency and bank runs," Working Paper Series 2636, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20222636
    Note: 2292323
    as

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    More about this item

    Keywords

    endogenous bank runs; financial crises; liquidity provision; saving externality;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • 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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