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Why do bank runs look like panic? A new explanation

  • Chen, Yehning

    (National Taiwan University)

  • Hasan, Iftekhar

    ()

    (Rensselaer Polytechnic Institute and Bank of Finland.)

This paper demonstrates that, even if depositors are fully rational and always choose the Pareto dominant equilibrium when there are multiple equilibria, a bank run may still occur when depositors’ expectations of the bank’s fundamentals do not change. More specifically, a bank run may occur when depositors learn that noisy bank-specific information is revealed, or when they learn that precise bank-specific information is not revealed. The results in this paper are consistent with empirical evidence about bank runs. It also implies that suspension of convertibility can improve the efficiency of bank runs.

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File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/0619netti.pdf
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Paper provided by Bank of Finland in its series Research Discussion Papers with number 19/2006.

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Length: 25 pages
Date of creation: 27 Sep 2006
Date of revision:
Handle: RePEc:hhs:bofrdp:2006_019
Contact details of provider: Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.suomenpankki.fi/en/

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  1. V.V. Chari & Ravi Jagannathan, 1984. "Banking Panics," Discussion Papers 618, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  2. Calomiris, Charles W., 1990. "Is Deposit Insurance Necessary? A Historical Perspective," The Journal of Economic History, Cambridge University Press, vol. 50(02), pages 283-295, June.
  3. Dwyer, Gerald Jr. & Hasan, Iftekhar, 2007. "Suspension of payments, bank failures, and the nonbank public's losses," Journal of Monetary Economics, Elsevier, vol. 54(2), pages 565-580, March.
  4. Chen, Yehning & Hasan, Iftekhar, 2006. "The transparency of the banking system and the efficiency of information-based bank runs," Journal of Financial Intermediation, Elsevier, vol. 15(3), pages 307-331, July.
  5. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June.
  6. Hasan, Iftekhar & Dwyer, Gerald P, Jr, 1994. "Bank Runs in the Free Banking Period," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(2), pages 271-88, May.
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