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Deposit and Credit Reallocation in a Banking Panic: The Role of State-Owned Banks

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  • Acharya, Viral
  • Das, Abhiman
  • Kulkarni, Nirupama
  • Mishra, Prachi
  • Prabhala, Nagpurnanand

Abstract

We study a bank run in India in which private bank branches experience sudden and considerable loss of deposits, which migrate to state-owned public sector banks (PSBs) that serve as safe havens. We trace the consequences of the deposit reallocation using granular bank-firm relationship and branch balance sheet data. The flight to safety is not a flight to quality. Lending shrinks and credit quality improves at the run banks but worsens at the PSBs receiving the flight-to-safety flows, especially the weaker ones. The resource reallocation is inefficient in the aggregate.

Suggested Citation

  • Acharya, Viral & Das, Abhiman & Kulkarni, Nirupama & Mishra, Prachi & Prabhala, Nagpurnanand, 2022. "Deposit and Credit Reallocation in a Banking Panic: The Role of State-Owned Banks," CEPR Discussion Papers 17621, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:17621
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    References listed on IDEAS

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    1. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
    2. Jeremy C. Stein & Anil K. Kashyap, 2000. "What Do a Million Observations on Banks Say about the Transmission of Monetary Policy?," American Economic Review, American Economic Association, vol. 90(3), pages 407-428, June.
    3. Kristian Blickle & Markus Brunnermeier & Stephan Luck, 2024. "Who Can Tell Which Banks Will Fail?," The Review of Financial Studies, Society for Financial Studies, vol. 37(9), pages 2685-2731.
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    Cited by:

    1. Shy, Oz, 2025. "Faster bank runs," European Economic Review, Elsevier, vol. 172(C).
    2. van der Geest, Jesse, 2024. "Economic effects of tax avoidance and compliance," Other publications TiSEM aaca33bf-975d-4e21-9b5f-5, Tilburg University, School of Economics and Management.

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    Keywords

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    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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