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Cash out or carry on: When bank runs build resilience

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Listed:
  • Baldwin, Kenneth
  • Alhalboni, Maryam

Abstract

We integrate liquidity risk into a first passage time solvency model to measure the joint probability of bank default. Counterintuitively, we find that the interaction between liquidity and solvency risks can, under plausible conditions, lower the overall likelihood of default. This finding is significant to the supply of credit to the real economy, as it reduces the pressure on banks to scale back risk-taking by tightening lending conditions after negative liquidity shocks. As far as we know, our combined liquidity-solvency model is the first to demonstrate this stabilizing effect.

Suggested Citation

  • Baldwin, Kenneth & Alhalboni, Maryam, 2025. "Cash out or carry on: When bank runs build resilience," Economics Letters, Elsevier, vol. 256(C).
    • Handle: RePEc:eee:ecolet:v:256:y:2025:i:c:s0165176525004185
    DOI: 10.1016/j.econlet.2025.112581
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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