Can Macroprudential Policy for Retail Banks Reduce Bank Runs? Evidence from WAEMU’s Banking Sector

Motivated by the coexistence of retail and wholesale banks with distinct risk profiles under uniform capital regulation, and by the lack of quantitative evidence on whether differentiated capital requirements can reduce bank runs and interbank frictions in low-income monetary unions, this paper aims to determine a capital ratio for retail banks that can reduce the likelihood of bank runs in the WAEMU area. The study also compares the impact of imposing capital requirements on retail banks versus implementing the same level of regulation for wholesale banks. The key findings are as follows: A capital ratio of 10 percent for retail banks is found to be sufficient to reduce the probability of bank runs and mitigate interbank market frictions in the WAEMU area. Similarly, applying the same requirements to wholesale banks also reduces the likelihood of bank runs. Implementing capital requirements on retail banks does not significantly affect interbank lending costs, whereas imposing the same requirements on wholesale banks leads to an increase in these costs. Consequently, regulating retail banks tends to shift assets towards wholesale banks, while regulating wholesale banks reallocates assets towards retail banks. The calculated capital ratio of 10 percent for retail banks maximizes welfare, surpassing the welfare achieved when the same requirements are imposed on wholesale banks. Therefore, the same capital ratio offers greater stability benefits for retail banks than wholesale banks, highlighting the mismatch between uniform capital regulations and heterogeneous banking models.