Advanced Search
MyIDEAS: Login to save this paper or follow this series

Contagious Bank Runs: Experimental Evidence

Contents:

Author Info

  • Brown, Martin

    ()

  • Trautmann, Stefan T.

    ()

  • Vlahu, Razvan

    ()

Abstract

We conduct a laboratory experiment to examine under which circumstances a depositor-run at one bank may lead to a depositor-run at another bank. We implement two-person coordination games which capture the essence of the Diamond-Dybvig (1983) bank-run model. Subjects in the roles of followers observe the deposit withdrawal decisions of leaders before they make their own deposit withdrawal decisions. In one treatment followers know that there are no economic linkages between the leaders’ and the followers’ banks. In a second treatment followers know that there are economic linkages between the leaders’ and the followers’ banks. Our results suggest that deposit withdrawals are strongly contagious across banks only when depositors know that there are economic linkages between banks’. The contagion of withdrawals is by a change in beliefs about bank asset quality and in beliefs about the behavior of other depositors, with the latter channel being more pronounced. Our results reconcile panic-based and information-based explanations of bank runs.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www1.vwa.unisg.ch/RePEc/usg/sfwpfi/WPF-1207.pdf
Download Restriction: no

Bibliographic Info

Paper provided by University of St. Gallen, School of Finance in its series Working Papers on Finance with number 1207.

as in new window
Length: 29 pages
Date of creation: Oct 2012
Date of revision:
Handle: RePEc:usg:sfwpfi:2012:07

Contact details of provider:
Phone: +41 71 243 40 11
Fax: +41 71 243 40 40
Web page: http://www.unisg.ch/de/Schools/Finance.aspx
More information through EDIRC

Related research

Keywords: Contagion; Bank runs; Systemic risk.;

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Martin Brown & Christian Zehnder, 2006. "Credit Reporting, Relationship Banking, and Loan Repayment," Working Papers 2006-03, Swiss National Bank.
  2. Viral V. Acharya & Tanju Yorulmazer, 2008. "Cash-in-the-Market Pricing and Optimal Resolution of Bank Failures," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 21(6), pages 2705-2742, November.
  3. Ibragimov, Rustam & Jaffee, Dwight & Walden, Johan, 2011. "Diversification disasters," Journal of Financial Economics, Elsevier, Elsevier, vol. 99(2), pages 333-348, February.
  4. Wagner, Wolf, 2010. "Diversification at financial institutions and systemic crises," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 19(3), pages 373-386, July.
  5. Paul Goldsmith-Pinkham & Tanju Yorulmazer, 2010. "Liquidity, Bank Runs, and Bailouts: Spillover Effects During the Northern Rock Episode," Journal of Financial Services Research, Springer, Springer, vol. 37(2), pages 83-98, June.
  6. Rochet, Jean-Charles & Tirole, Jean, 1996. "Interbank Lending and Systemic Risk," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 28(4), pages 733-62, November.
  7. Markus K. Brunnermeier & Lasse Heje Pedersen, 2009. "Market Liquidity and Funding Liquidity," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 22(6), pages 2201-2238, June.
  8. Calomiris, Charles W & Kahn, Charles M, 1991. "The Role of Demandable Debt in Structuring Optimal Banking Arrangements," American Economic Review, American Economic Association, American Economic Association, vol. 81(3), pages 497-513, June.
  9. Postlewaite, Andrew & Vives, Xavier, 1987. "Bank Runs as an Equilibrium Phenomenon," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 95(3), pages 485-91, June.
  10. Hubert Janos Kiss & Ismael Rodriguez‐Lara & Alfonso Rosa‐García, 2012. "On the Effects of Deposit Insurance and Observability on Bank Runs: An Experimental Study," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 44(8), pages 1651-1665, December.
  11. Garratt, Rod & Keister, Todd, 2009. "Bank runs as coordination failures: An experimental study," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 71(2), pages 300-317, August.
  12. Martin Brown & Christian Zehnder, 2008. "The Emergence of Information Sharing in Credit Markets," Working Papers 2008-01, Swiss National Bank.
  13. Lelyveld, Iman van & Liedorp, Franka, 2004. "Interbank Contagion in the Dutch Banking Sector," MPRA Paper 651, University Library of Munich, Germany, revised 11 Jul 2005.
  14. Ai, Chunrong & Norton, Edward C., 2003. "Interaction terms in logit and probit models," Economics Letters, Elsevier, Elsevier, vol. 80(1), pages 123-129, July.
  15. Xavier Freixas & Bruno Parigi & Jean Charles Rochet, 1998. "Systemic risk, interbank relations and liquidity provision by the Central Bank," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 440, Department of Economics and Business, Universitat Pompeu Fabra, revised Sep 1999.
  16. Xavier Freixas & Bruno Parigi, 1998. "Contagion and efficiency in gross and net interbank payment systems," Proceedings, Federal Reserve Bank of Chicago 592, Federal Reserve Bank of Chicago.
  17. Douglas W. Diamond, 2007. "Banks and liquidity creation : a simple exposition of the Diamond-Dybvig model," Economic Quarterly, Federal Reserve Bank of Richmond, Federal Reserve Bank of Richmond, issue Spr, pages 189-200.
  18. Acharya, Viral V & Yorulmazer, Tanju, 2004. "Too Many to Fail - An Analysis of Time Inconsistency in Bank Closure Policies," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4778, C.E.P.R. Discussion Papers.
  19. Bryant, John, 1980. "A model of reserves, bank runs, and deposit insurance," Journal of Banking & Finance, Elsevier, Elsevier, vol. 4(4), pages 335-344, December.
  20. Upper, Christian & Worms, Andreas, 2002. "Estimating Bilateral Exposures in the German Interbank Market: Is there a Danger of Contagion?," Discussion Paper Series 1: Economic Studies 2002,09, Deutsche Bundesbank, Research Centre.
  21. Cachon, Gerard P & Camerer, Colin F, 1996. "Loss-Avoidance and Forward Induction in Experimental Coordination Games," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 111(1), pages 165-94, February.
  22. Garcia-Rosa, Alfonso & Kiss, Hubert Janos & Rodriguez-Lara, Ismael, 2010. "Do Social Networks Prevent Bank Runs?," UMUFAE Economics Working Papers, DIGITUM. Universidad de Murcia 9723, DIGITUM. Universidad de Murcia.
  23. Upper, Christian, 2011. "Simulation methods to assess the danger of contagion in interbank markets," Journal of Financial Stability, Elsevier, Elsevier, vol. 7(3), pages 111-125, August.
  24. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(3), pages 401-19, June.
  25. Carin van der Cruijsen & Jakob de Haan & David-Jan Jansen & Robert Mosch, 2011. "Household savings behaviour in crisis times," DNB Working Papers, Netherlands Central Bank, Research Department 315, Netherlands Central Bank, Research Department.
  26. Simon Wells, 2004. "Financial interlinkages in the United Kingdom's interbank market and the risk of contagion," Bank of England working papers, Bank of England 230, Bank of England.
  27. Swary, Itzhak, 1986. "Stock Market Reaction to Regulatory Action in the Continental Illinois Crisis," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 59(3), pages 451-73, July.
  28. Paolo Emilio Mistrulli, 2007. "Assessing financial contagion in the interbank market: Maximum entropy versus observed interbank lending patterns," Temi di discussione (Economic working papers), Bank of Italy, Economic Research and International Relations Area 641, Bank of Italy, Economic Research and International Relations Area.
  29. Xavier Freixas & Jean-Charles Rochet, 2008. "Microeconomics of Banking, 2nd Edition," MIT Press Books, The MIT Press, The MIT Press, edition 2, volume 1, number 0262062704, December.
  30. Saunders, Anthony & Wilson, Berry, 1996. "Contagious Bank Runs: Evidence from the 1929-1933 Period," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 5(4), pages 409-423, October.
  31. Jacklin, Charles J & Bhattacharya, Sudipto, 1988. "Distinguishing Panics and Information-Based Bank Runs: Welfare and Policy Implications," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 96(3), pages 568-92, June.
  32. Dimitri Dubois & Marc Willinger & Phu Nguyen Van, 2008. "Optimization incentive and relative riskiness in experimental coordination games," Working Papers, LAMETA, Universtiy of Montpellier 08-19, LAMETA, Universtiy of Montpellier, revised Nov 2008.
  33. Aharony, Joseph & Swary, Itzhak, 1996. "Additional evidence on the information-based contagion effects of bank failures," Journal of Banking & Finance, Elsevier, Elsevier, vol. 20(1), pages 57-69, January.
  34. Itay Goldstein & Ady Pauzner, 2005. "Demand-Deposit Contracts and the Probability of Bank Runs," Journal of Finance, American Finance Association, American Finance Association, vol. 60(3), pages 1293-1327, 06.
  35. De Graeve, Ferre & Karas, Alexei, 2010. "Identifying VARs through Heterogeneity: An Application to Bank Runs," Working Paper Series 244, Sveriges Riksbank (Central Bank of Sweden).
  36. Aharony, Joseph & Swary, Itzhak, 1983. "Contagion Effects of Bank Failures: Evidence from Capital Markets," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 56(3), pages 305-22, July.
  37. Acharya, Viral V., 2009. "A theory of systemic risk and design of prudential bank regulation," Journal of Financial Stability, Elsevier, Elsevier, vol. 5(3), pages 224-255, September.
  38. Degryse, Hans & Kim, Moshe & Ongena, Steven, 2009. "Microeconometrics of Banking Methods, Applications, and Results," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780195340471, October.
  39. Amil Dasgupta, 2004. "Financial Contagion Through Capital Connections: A Model of the Origin and Spread of Bank Panics," Journal of the European Economic Association, MIT Press, MIT Press, vol. 2(6), pages 1049-1084, December.
  40. Yehning Chen, 1999. "Banking Panics: The Role of the First-Come, First-Served Rule and Information Externalities," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 107(5), pages 946-968, October.
  41. Schotter, Andrew & Yorulmazer, Tanju, 2009. "On the dynamics and severity of bank runs: An experimental study," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 18(2), pages 217-241, April.
  42. Anat Bracha & Julian C. Jamison, 2012. "Shifting confidence in homeownership: the Great Recession," Public Policy Discussion Paper, Federal Reserve Bank of Boston 12-4, Federal Reserve Bank of Boston.
  43. Rydval, Ondrej & Ortmann, Andreas, 2005. "Loss avoidance as selection principle: Evidence from simple stag-hunt games," Economics Letters, Elsevier, Elsevier, vol. 88(1), pages 101-107, July.
  44. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, Springer, vol. 10(2), pages 171-178, June.
  45. Fehr, Ernst & Zehnder, Christian, 2009. "Reputation and Credit Market Formation: How Relational Incentives and Legal Contract Enforcement Interact," IZA Discussion Papers 4351, Institute for the Study of Labor (IZA).
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Kiss, Hubert Janos & Rodriguez-Lara, Ismael & Rosa-García, Alfonso, 2014. "Do Women Panic More Than Men? An Experimental Study on Financial Decision," MPRA Paper 52912, University Library of Munich, Germany.
  2. Brown, Martin & Guin, Benjamin & Morkoetter, Stefan, 2013. "Switching Costs, Deposit Insurance and Deposit Withdrawals from Distressed Banks," Working Papers on Finance, University of St. Gallen, School of Finance 1319, University of St. Gallen, School of Finance.
  3. Hubert Janos Kiss & Ismael Rodriguez-Lara & Alfonso Rosa-Garcia, 2013. "Do Social Networks Prevent or Promote Bank Runs?," IEHAS Discussion Papers, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences 1344, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:usg:sfwpfi:2012:07. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Geraldine Frei).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.