Bank Runs, Fragility, and Credit Easing
We present a tractable dynamic macroeconomic model of self-fulfilling bank runs. A bank is vulnerable to a run when a loss of investors' confidence triggers deposit withdrawals and leads the bank to default on its obligations. We analytically characterize how the vulnerability of an individual bank depends on macroeconomic aggregates and how the number of banks facing a run affects macroeconomic aggregates in turn. In general equilibrium, runs can be partial or complete, depending on aggregate leverage and the dynamics of asset prices. Our normative analysis shows that the effectiveness of credit easing and its welfare implications depend on whether a financial crisis is driven by fundamentals or by self-fulfilling runs.
We thank Markus Brunnermeier, Huberto Ennis, Todd Keister, and Ettore Panetti for excellent discussions. We also thank Mark Aguiar for helpful conversations and conference and seminar participants at Carlos III, CUHK, ITAM-PIER Conference on Macro-Finance, Joint Florida Macro, Minneapolis Fed, NBER Summer Institute (IFM/ME/MEFM), the National Bank of Belgium, Oxford, the Ridge Forum on Financial Stability, System Committee Workshop on Financial Institutions, Regulation, and Markets, the Universidad de Montevideo, and the Virtual Finance Theory Seminar. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis, the Federal Reserve System, or the National Bureau of Economic Research.