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Bank Runs without Sequential Service

Author

Listed:
  • David Andolfatto
  • Ed Nosal

Abstract

Banking models in the tradition of Diamond and Dybvig (1983) rely on sequential service to explain belief-driven runs. But the run-like phenomena witnessed during the financial crisis of 2007?08 occurred in the wholesale shadow banking sector where sequential service is largely absent, suggesting that something other than sequential service is needed to help explain runs. We show that in the absence of sequential service runs can easily occur whenever bank-funded investments are subject to increasing returns to scale consistent with available evidence. Our framework is used to understand and evaluate recent banking and money market regulations.

Suggested Citation

  • David Andolfatto & Ed Nosal, 2018. "Bank Runs without Sequential Service," FRB Atlanta Working Paper 2018-6, Federal Reserve Bank of Atlanta.
  • Handle: RePEc:fip:fedawp:2018-06
    DOI: 10.29338/wp2018-06
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    References listed on IDEAS

    as
    1. Dean Corbae & Pablo D'Erasmo, 2014. "Capital requirements in a quantitative model of banking industry dynamics," Working Papers 14-13, Federal Reserve Bank of Philadelphia, revised 04 Apr 2014.
    2. Renee Courtois Haltom & Bruno Sultanum, 2018. "Preventing Bank Runs," Richmond Fed Economic Brief, Federal Reserve Bank of Richmond.
    3. Cooper, Russell & Corbae, Dean, 2002. "Financial Collapse: A Lesson from the Great Depression," Journal of Economic Theory, Elsevier, vol. 107(2), pages 159-190, December.
    4. Edward J. Green & Ping Lin, 2000. "Diamond and Dybvig's classic theory of financial intermediation : what's missing?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue win, pages 3-13.
    5. Bryant, John, 1980. "A model of reserves, bank runs, and deposit insurance," Journal of Banking & Finance, Elsevier, vol. 4(4), pages 335-344, December.
    6. Cooper, Russell & Ross, Thomas W., 1998. "Bank runs: Liquidity costs and investment distortions," Journal of Monetary Economics, Elsevier, vol. 41(1), pages 27-38, February.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    bank runs; increasing returns to scale; echanism design;

    JEL classification:

    • 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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