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Bank Runs, Fragility, and Regulation

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  • Manuel Amador
  • Javier Bianchi

Abstract

We examine banking regulation in a macroeconomic model of bank runs. We construct a general equilibrium model where banks may default because of fundamental or self-fulfilling runs. With only fundamental defaults, we show that the competitive equilibrium is constrained efficient. However, when banks are vulnerable to runs, banks’ leverage decisions are not ex-ante optimal: individual banks do not internalize that higher leverage makes other banks more vulnerable. The theory calls for introducing minimum capital requirements, even in the absence of bailouts.

Suggested Citation

  • Manuel Amador & Javier Bianchi, 2024. "Bank Runs, Fragility, and Regulation," Working Papers 804, Federal Reserve Bank of Minneapolis.
  • Handle: RePEc:fip:fedmwp:98383
    DOI: 10.21034/wp.804
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    References listed on IDEAS

    as
    1. Mark Aguiar & Manuel Amador & Hugo Hopenhayn & Iván Werning, 2019. "Take the Short Route: Equilibrium Default and Debt Maturity," Econometrica, Econometric Society, vol. 87(2), pages 423-462, March.
    2. Hans Gersbach & Jean-Charles Rochet, 2012. "Aggregate Investment Externalities and Macroprudential Regulation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44, pages 73-109, December.
    3. Ottonello, Pablo & Perez, Diego J. & Varraso, Paolo, 2022. "Are collateral-constraint models ready for macroprudential policy design?," Journal of International Economics, Elsevier, vol. 139(C).
    4. Timothy J. Kehoe & David K. Levine, 1993. "Debt-Constrained Asset Markets," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 60(4), pages 865-888.
    5. Harold L. Cole & Timothy J. Kehoe, 2000. "Self-Fulfilling Debt Crises," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 67(1), pages 91-116.
    6. Jiang, Erica Xuewei & Matvos, Gregor & Piskorski, Tomasz & Seru, Amit, 2024. "Monetary tightening and U.S. bank fragility in 2023: Mark-to-market losses and uninsured depositor runs?," Journal of Financial Economics, Elsevier, vol. 159(C).
    7. Aguiar, Mark & Amador, Manuel, 2019. "A contraction for sovereign debt models," Journal of Economic Theory, Elsevier, vol. 183(C), pages 842-875.
    8. Calomiris, Charles W & Kahn, Charles M, 1991. "The Role of Demandable Debt in Structuring Optimal Banking Arrangements," American Economic Review, American Economic Association, vol. 81(3), pages 497-513, June.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Self-fulfilling bank runs; Banking crises; Macroprudential policy;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G01 - Financial Economics - - General - - - Financial Crises
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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