Procyclical Leverage and Crisis Probability in a Macroeconomic Model of Bank Runs

A macroprudential perspective posits a link between bank fundamentals and the likelihood of banking crises. We articulate this link by developing a dynamic general equilibrium model that features bank runs in a global game framework. The model endogenizes the probability of bank runs as a function of bank fundamentals, leverage in particular. The model generates procyclical leverage and shows that credit growth tends to precede banking crises, replicating the empirical finding of Schularick and Taylor (2012). Countercyclical leverage restrictions can improve social welfare by reducing the crisis probability despite dampening economic activities in normal times.