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Bank runs, prudential tools and social welfare in a global game general equilibrium model

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  • Daisuke, Ikeda

    (Bank of England)

Abstract

I develop a general equilibrium model that features endogenous bank runs in a global game framework. A bank run probability — systemic risk — is increasing in bank leverage and decreasing in bank liquid asset holdings. Bank risk shifting and pecuniary externalities induce excessive leverage and insufficient liquidity, resulting in elevated systemic risk from a social welfare viewpoint. Addressing the inefficiencies requires prudential tools on both leverage and liquidity. Imposing one tool only causes risk migration: banks respond by taking more risk in another area. I extend the model and study risk migration in other fields including sectoral lending, concentration risk and shadow banking.

Suggested Citation

  • Daisuke, Ikeda, 2018. "Bank runs, prudential tools and social welfare in a global game general equilibrium model," Bank of England working papers 732, Bank of England.
    • Handle: RePEc:boe:boeewp:0732
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    File URL: https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2018/bank-runs-prudential-tools-and-social-welfare-in-a-global-game-general-equilibrium-model.pdf
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    Citations

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    Cited by:

    1. Daisuke Ikeda & Hidehiko Matsumoto, 2021. "Procyclical Leverage and Crisis Probability in a Macroeconomic Model of Bank Runs," IMES Discussion Paper Series 21-E-01, Institute for Monetary and Economic Studies, Bank of Japan.
    2. Ryo Kato & Takayuki Tsuruga, 2022. "Pecuniary externalities, bank overleverage, and macroeconomic fragility," International Journal of Economic Theory, The International Society for Economic Theory, vol. 18(4), pages 554-577, December.
    3. Hibiki Ichiue & Jean-Guillaume Sahuc & Yasin Mimir & Jolan Mohimont & Kalin Nikolov & Olivier de Bandt & Sigrid Roehrs & Valério Scalone & Michael Straughan & Bora Durdu, 2022. "Assessing the Impact of Basel III: Evidence from Structural Macroeconomic Models," Working Papers hal-04159816, HAL.
    4. Vo, Quynh-Anh, 2021. "Interactions of capital and liquidity requirements: a review of the literature," Bank of England working papers 916, Bank of England.
    5. Anil K. Kashyap & Dimitrios P. Tsomocos & Alexandros Vardoulakis, 2017. "Optimal Bank Regulation in the Presence of Credit and Run Risk," Finance and Economics Discussion Series 2017-097, Board of Governors of the Federal Reserve System (U.S.).

    More about this item

    Keywords

    Bank runs; global games; capital and liquidity requirements; risk migration;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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