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Understanding Bank Runs: The Importance of Depositor-Bank Relationships and Networks

  • Rajkamal Iyer
  • Manju Puri
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    We use a unique, new, database to examine micro depositor level data for a bank that faced a run. We use minute-by-minute depositor withdrawal data to understand the effectiveness of deposit insurance, the role of social networks, and the importance of bank-depositor relationships in influencing depositor propensity to run. We employ methods from the epidemiology literature which examine how diseases spread to estimate transmission probabilities of depositors running, and the significant underlying factors. We find that deposit insurance is only partially effective in preventing bank runs. Further, our results suggest that social network effects are important but are mitigated by other factors, in particular the length and depth of the bank-depositor relationship. Depositors with longer relationships and those who have availed of loans from a bank are less likely to run during a crisis, suggesting that cross-selling acts not just as a revenue generator but also as a complementary insurance mechanism for the bank. Finally, we find there are long term effects of a solvent bank run in that depositors who run do not return back to the bank. Our results help understand the underlying dynamics of bank runs and hold important policy implications.

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    File URL: http://www.nber.org/papers/w14280.pdf
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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14280.

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    Date of creation: Aug 2008
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    Publication status: published as Rajkamal Iyer & Manju Puri, 2008. "Understanding bank runs: the importance of depositor-bank relationships and networks," Proceedings, Federal Reserve Bank of Chicago, issue May, pages 280-281.
    Handle: RePEc:nbr:nberwo:14280
    Note: CF ME
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