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Incomplete Solvency Information as a Trigger for Systemwide Bank Runs

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  • Sangkyun Park

    (Retired from The U.S. Office of Management and Budget, USA)

Abstract

This paper presents a model of bank runs and evaluates relevant policy tools. The model is founded on the historical pattern of banking panics, involving an economic boom, an adverse shock, prominent bank failures, and runs on both insolvent and solvent banks. The model analyzes various ways in which solvency information affects the likelihood of systemwide bank runs. An interesting result is that partial bank-specific information can be worse than no bank-specific information. The model can also explain runs driven by liquidity concern based on incomplete solvency information. The main policy implication derived from the model and the evaluation of policy tools is that policy actions to contain a financial crisis should incorporate weeding out insolvent institutions and assuring the solvency of remaining institutions.

Suggested Citation

  • Sangkyun Park, 2025. "Incomplete Solvency Information as a Trigger for Systemwide Bank Runs," Journal of Economic Analysis, Anser Press, vol. 4(2), pages 73-90, June.
    • Handle: RePEc:bba:j00001:v:4:y:2025:i:2:p:73-90:d:410
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    References listed on IDEAS

    as
    1. Ladley, Daniel, 2013. "Contagion and risk-sharing on the inter-bank market," Journal of Economic Dynamics and Control, Elsevier, vol. 37(7), pages 1384-1400.
    2. Anginer, Deniz & Demirguc-Kunt, Asli & Zhu, Min, 2014. "How does deposit insurance affect bank risk? Evidence from the recent crisis," Journal of Banking & Finance, Elsevier, vol. 48(C), pages 312-321.
    3. Furfine, Craig H, 2003. "Interbank Exposures: Quantifying the Risk of Contagion," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(1), pages 111-128, February.
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