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A Model of a Systemic Bank Run

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  • Harald Uhlig

Abstract

The 2008 financial crisis is reminiscent of a bank run, but not quite. In particular, it is financial institutions withdrawing deposits from some core financial institutions, rather than depositors running on their local bank. These core financial institutions have invested the funds in asset-backed securities rather than committed to long-term projects. These securities can potentially be sold to a large pool of outside investors. The question arises, why these investors require steep discounts to do so. I therefore set out to provide a model of a systemic bank run delivering six stylized key features of this crisis. 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. I conclude from that that the variant with uncertainty averse investors is more suitable to analyze policy implications. This paper therefore provides a model, in which 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 Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15072.

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Date of creation: Jun 2009
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Handle: RePEc:nbr:nberwo:15072

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Blog mentions

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  1. Repo runs
    by Economic Logician in Economic Logic on 2010-05-28 15:10:00
  2. 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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Cited by:
  1. Karantounias, Anastasios G., 2013. "Managing pessimistic expectations and fiscal policy," Theoretical Economics, Econometric Society, vol. 8(1), January.
  2. Goodhart, Charles, 2011. "¿Es un sistema financiero menos procíclico una meta alcanzable?," Revista Estudios Económicos, Banco Central de Reserva del Perú, issue 21, pages 9-22.
  3. Landier, Augustin & Ueda, Kenichi, 2009. "True Taxpayer Burden of Bank Restructuring," IDEI Working Papers 662, Institut d'Économie Industrielle (IDEI), Toulouse, revised 16 Dec 2010.
  4. Ennis, Huberto M. & Keister, Todd, 2010. "Banking panics and policy responses," Journal of Monetary Economics, Elsevier, vol. 57(4), pages 404-419, May.
  5. Ellison, Martin & Sargent, Thomas J, 2009. "A defence of the FOMC," CEPR Discussion Papers 7510, C.E.P.R. Discussion Papers.
    • Martin Ellison & Thomas J. Sargent, 2012. "A Defense Of The Fomc," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 53(4), pages 1047-1065, November.
  6. Oguro, Kazumasa & Sato, Motohiro, 2012. "Default Risk on Government Bonds, Deflation, and Inflation," CIS Discussion paper series 537, Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University.
  7. Martin Schneider, 2010. "The Research Agenda: Martin Schneider on Multiple Priors Preferences and Financial Markets," EconomicDynamics Newsletter, Review of Economic Dynamics, vol. 11(2), April.
  8. Christian Calmès & Raymond Théoret, 2012. "The procyclicality of Basel III leverage: Elasticity-based indicators and the Kalman filter," RePAd Working Paper Series UQO-DSA-wp012012, Département des sciences administratives, UQO.
  9. Anastasios G. Karantounias with Lars Peter Hansen & Thomas J. Sargent, 2009. "Managing expectations and fiscal policy," Working Paper 2009-29, Federal Reserve Bank of Atlanta.
  10. Cinzia Alcidi & Daniel Gros, 2011. "Great recession versus great depression: monetary, fiscal and banking policies," Journal of Economic Studies, Emerald Group Publishing, vol. 38(6), pages 673-690, November.

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