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Managing Confidence in Emerging Market Bank Runs

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  • Ashoka Mody
  • Se-Jik Kim

Abstract

In a rational-expectations framework, we model depositors'' confidence as a function of the probability of future bank bailouts. We analyze the effect of alternative bank bailout policies on depositors'' confidence in an emerging market setting, where liquidity shortages of banks are revealed sequentially and governments cannot credibly commit to bailing out all potentially distressed banks. Our findings suggest that allowing early bank failures and using available liquidity for credible commitments to later bailouts can better boost confidence than early bailouts. This conclusion arises because with a high chance of liquidity shortage in the future, depositors may lose confidence and hence withdraw deposits even from potentially sound banks. Such a policy of late bailouts is likely to receive political support when a full bailout needs to be financed by taxation. The logic of late bailout remains valid even when banks may hide their distress or when closures of early distressed banks create contagion.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 04/235.

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Length: 29
Date of creation: 01 Dec 2004
Date of revision:
Handle: RePEc:imf:imfwpa:04/235

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Related research

Keywords: Banks; Liquidity management; Emerging markets; bank runs; contagion; banking; banking crisis; bank closures; bank run; bank bailouts; banking crises; bankers; recapitalization; banking system; liquidity crisis; banker; currency crisis; bank loans; bank depositors; speculative attacks; bank bailout; bank failures; deposit insurance; financial contagion; bank of korea; crisis countries; distressed bank; systemic banking crises; crisis contagion; demand deposit; asian currency crisis; recession;

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References

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  1. Burnside, A Craig & Eichenbaum, Martin & Rebelo, Sérgio, 1998. "Prospective Deficits and the Asian Currency Crises," CEPR Discussion Papers 2015, C.E.P.R. Discussion Papers.
  2. Kenneth Kang & Hong Liang & Henry Ma & Anthony J. Richards & Ajai Chopra & Meral Karasulu, 2001. "From Crisis to Recovery in Korea," IMF Working Papers 01/154, International Monetary Fund.
  3. Raghuram G. Rajan, 2004. "Dollar Shortages and Crises," NBER Working Papers 10845, National Bureau of Economic Research, Inc.
  4. Haizhou Huang & C. A. E. Goodhart, 2000. "A Simple Model of An International Lender of Last Resort," IMF Working Papers 00/75, International Monetary Fund.
  5. Lerrick, Adam & Meltzer, Allan H., 2003. "Blueprint for an international lender of last resort," Journal of Monetary Economics, Elsevier, vol. 50(1), pages 289-303, January.
  6. Ashoka Mody, 2004. "What is An Emerging Market?," IMF Working Papers 04/177, International Monetary Fund.
  7. Marc Quintyn & David S. Hoelscher, 2003. "Managing Systemic Banking Crises," IMF Occasional Papers 224, International Monetary Fund.
  8. Cordella, Tito & Yeyati, Eduardo Levy, 2003. "Bank bailouts: moral hazard vs. value effect," Journal of Financial Intermediation, Elsevier, vol. 12(4), pages 300-330, October.
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Cited by:
  1. Laeven, Luc & Valencia, Fabián, 2012. "The use of blanket guarantees in banking crises," Journal of International Money and Finance, Elsevier, vol. 31(5), pages 1220-1248.

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