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Bailouts and bank runs: Theory and evidence from TARP

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  • Wang, Chunyang

Abstract

During the recent financial crisis, there were bank runs right after government bailout announcements. This paper develops a global game model of information based bank runs to analyze how the announcement of bailouts affects investors’ bank run incentives. The equilibrium probability of bank runs is uniquely determined. I conclude that before the announcement, the existence of such bailout policy reduces investors’ bank run incentives, but after the announcement, investors may run on the bank, since such an announcement reflects the government's information about the bad bank asset. The empirical evidence from TARP is consistent with my theory.

Suggested Citation

  • Wang, Chunyang, 2013. "Bailouts and bank runs: Theory and evidence from TARP," European Economic Review, Elsevier, vol. 64(C), pages 169-180.
    • Handle: RePEc:eee:eecrev:v:64:y:2013:i:c:p:169-180
    DOI: 10.1016/j.euroecorev.2013.08.005
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    References listed on IDEAS

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    1. Veronesi, Pietro & Zingales, Luigi, 2010. "Paulson's gift," Journal of Financial Economics, Elsevier, vol. 97(3), pages 339-368, September.
    2. Todd Keister, 2016. "Bailouts and Financial Fragility," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 83(2), pages 704-736.
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    4. Itay Goldstein & Ady Pauzner, 2005. "Demand–Deposit Contracts and the Probability of Bank Runs," Journal of Finance, American Finance Association, vol. 60(3), pages 1293-1327, June.
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    Cited by:

    1. Hubert János Kiss, 2018. "Depositors’ Behaviour in Times of Mass Deposit Withdrawals," Financial and Economic Review, Magyar Nemzeti Bank (Central Bank of Hungary), vol. 17(4), pages 95-111.
    2. Ming Yi, 2017. "Dynamic beauty contests: Learning from the winners to win?," Journal of Economics, Springer, vol. 122(1), pages 67-92, September.
    3. Yi, Ming, 2017. "Speculator-triggered crisis and interventions," Journal of Macroeconomics, Elsevier, vol. 52(C), pages 135-146.
    4. Shakina, Ekaterina & Angerer, Martin, 2018. "Coordination and communication during bank runs," Journal of Behavioral and Experimental Finance, Elsevier, vol. 20(C), pages 115-130.
    5. Jan Libich & Dat Thanh Nguyen & Hubert Janos Kiss, 2023. "Running Out of Bank Runs," Journal of Financial Services Research, Springer;Western Finance Association, vol. 64(1), pages 1-39, August.
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    7. Nobel Prize Committee, 2022. "Financial Intermediation and the Economy," Nobel Prize in Economics documents 2022-2, Nobel Prize Committee.
    8. Cañón, Carlos & Margaretic, Paula, 2014. "Correlated bank runs, interbank markets and reserve requirements," Journal of Banking & Finance, Elsevier, vol. 49(C), pages 515-533.

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    Keywords

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    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • G01 - Financial Economics - - General - - - Financial Crises
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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