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Why do bank runs look like panic? A new explanation

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  • Chen, Yehning
  • Hasan, Iftekhar

Abstract

This paper demonstrates that, even if depositors are fully rational and always choose the Pareto dominant equilibrium when there are multiple equilibria, a bank run may still occur when depositors' expectations of the bank's fundamentals do not change.More specifically, a bank run may occur when depositors learn that noisy bank-specific information is revealed, or when they learn that precise bank-specific information is not revealed.The results in this paper are consistent with empirical evidence about bank runs. It also implies that suspension of convertibility can improve the efficiency of bank runs.

Suggested Citation

  • Chen, Yehning & Hasan, Iftekhar, 2006. "Why do bank runs look like panic? A new explanation," Bank of Finland Research Discussion Papers 19/2006, Bank of Finland.
    • Handle: RePEc:zbw:bofrdp:rdp2006_019
    as

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    File URL: https://www.econstor.eu/bitstream/10419/212044/1/bof-rdp2006-019.pdf
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    References listed on IDEAS

    as
    1. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 24(Win), pages 14-23.
    2. Chari, V V & Jagannathan, Ravi, 1988. " Banking Panics, Information, and Rational Expectations Equilibrium," Journal of Finance, American Finance Association, vol. 43(3), pages 749-761, July.
    3. Chen, Yehning & Hasan, Iftekhar, 2006. "The transparency of the banking system and the efficiency of information-based bank runs," Journal of Financial Intermediation, Elsevier, vol. 15(3), pages 307-331, July.
    4. Calomiris, Charles W., 1990. "Is Deposit Insurance Necessary? A Historical Perspective," The Journal of Economic History, Cambridge University Press, vol. 50(2), pages 283-295, June.
    5. Hasan, Iftekhar & Dwyer, Gerald P, Jr, 1994. "Bank Runs in the Free Banking Period," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(2), pages 271-288, May.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    bank run; banking panic; suspension of convertibility;
    All these keywords.

    JEL classification:

    • 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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