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American Economic Review: Vol. 99 No. 4 (September 2009)

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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

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)

JEL Classifications

G21: Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
G28: Financial Institutions and Services: Government Policy and Regulation


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