Survey of Bank Holidays and Fund Suspensions

In this paper, we analyze seven case studies involving bank holidays and two involving mutual fund suspensions produced by the Yale Program on Financial Stability. Our main purpose is to assist policymakers who are considering utilizing a bank holiday in designing the most effective program as efficiently as possible. We find that a bank holiday may be most useful when designing and implementing a comprehensive remedy to an underlying problem distressing banks, particularly when an exogenous shock rather than balance sheet weaknesses is the cause of general distress to the system. A holiday is also useful to "ring-fence" one or more banks and differentiate them from banks that are not distressed. In either case, the holiday only pauses the run. For a successful outcome, and to avoid a restart of runs, policymakers should be prepared to implement corrective actions to address the fundamental problem and commit to reopening only viable banks. However, we also conclude that, given the nature of bank holidays and depositor expectations regarding access to runnable assets, in most cases, the utility of a bank holiday is limited by the high risk of contagion and depositor behavior. For the banking sector, authorities are best advised to establish credible ex ante deposit insurance, effectively communicated and bolstered by a rigorous bank supervisory regime and a tailored resolution process, to prevent bank runs from occurring in the first place. We also find that suspensions of mutual fund investors' withdrawals can function similarly to bank holidays and carry a stigma that may lead administrators to avoid implementing them.