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American Economic Review: Vol. 99 No. 4 (September 2009)
AER Volume. 99, Issue 4 | 
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Bank Runs and Institutions: The Perils of Intervention
Article Citation
Ennis, Huberto M., and
Todd Keister. 2009. "Bank Runs and Institutions: The Perils of Intervention."
American Economic Review,
99(4): 1588-1607.
DOI: 10.1257/aer.99.4.1588
DOI: 10.1257/aer.99.4.1588
Abstract
We study ex post efficient policy responses to a run on the banking system and the ex ante incentives these responses create. We show that the efficient response to a run is typically not to freeze all remaining deposits, since doing so imposes heavy costs on some individuals. Instead, once a run is underway, (benevolent) government institutions would allow additional deposit withdrawals, placing further strain on the banking system. When depositors anticipate these extra withdrawals, their incentive to participate in the run increases. In fact, ex post efficient interventions can generate the conditions necessary for a self-fulfilling run to occur. (JEL G21, G8)
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Authors
Ennis, Huberto M. (U Carlos III de Madrid and Federal Reserve Bank of Richmond)
Keister, Todd (Federal Reserve Bank of New York)
Keister, Todd (Federal Reserve Bank of New York)
JEL Classifications
G21: Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
G28: Financial Institutions and Services: Government Policy and Regulation
G28: Financial Institutions and Services: Government Policy and Regulation
