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We study efficient liquidity reallocation in a model of panic-based bank runs. We demonstrate
that a competitive interbank market disciplines multiplicity in key equilibrium outcomes but
cannot achieve the constrained efficient level of welfare when aggregate liquidity is low. A
centralized reallocation of cash across banks can help tackle the underlying externality and
achieve fewer bank failures. We examine a particular implementation that reallocates cash
based on payment obligations between banks. An application to the Panic of 1873, where a
similar policy was implemented by the New York Clearinghouse, illustrates the quantitative
relevance of the mechanisms in our model.
