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Systemic bank runs without aggregate risk: How a misallocation of liquidity may trigger a solvency crisis

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  • Altermatt, Lukas
  • van Buggenum, Hugo
  • Voellmy, Lukas

Abstract

We develop a general equilibrium model of self-fulfilling bank runs. The key novelty is the way in which the banking system’s assets and liabilities are connected. Banks issue loans to entrepreneurs who sell goods to households, which in turn pay for the goods by redeeming bank deposits. The return on bank assets is thus contingent on households being able to withdraw their deposits. In a run, not all households that wish to consume manage to withdraw, since part of banks’ cash reserves end up in the hands of households without consumption needs. This misallocation of liquidity lowers revenues of entrepreneurs and bank asset returns, thereby rationalising the run. Interventions that restrict redemptions in a run can be self-defeating due to their negative effect on demand in goods markets. We show how runs can sometimes be prevented with combinations of deposit freezes and redemption penalties as well as with the provision of emergency liquidity.

Suggested Citation

  • Altermatt, Lukas & van Buggenum, Hugo & Voellmy, Lukas, 2024. "Systemic bank runs without aggregate risk: How a misallocation of liquidity may trigger a solvency crisis," Journal of Financial Economics, Elsevier, vol. 161(C).
  • Handle: RePEc:eee:jfinec:v:161:y:2024:i:c:s0304405x24001521
    DOI: 10.1016/j.jfineco.2024.103929
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    Cited by:

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    2. Feinstein, Zachary & Hałaj, Grzegorz & Søjmark, Andreas, 2024. "The not-so-hidden risks of ‘hidden-to-maturity’ accounting: on depositor runs and bank resilience," Working Paper Series 2970, European Central Bank.
    3. Barlevy, Gadi & Bird, Daniel & Fershtman, Daniel & Weiss, David, 2024. "Money under the mattress: Inflation and lending of last resort," Journal of Economic Theory, Elsevier, vol. 217(C).

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    More about this item

    Keywords

    Fragility; Deposit freezes; Emergency liquidity;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • G2 - Financial Economics - - Financial Institutions and Services

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