Bank Runs and Institutions: the Perils of Intervention

Huberto Ennis
Todd Keister
Publication Type: 
Papers
Journal Name: 
American Economic Review
Journal Volume: 
99
Journal Number: 
4
Pages: 
1588-1607
Publication Year: 
2009

We study ex post efficient policy responses to a run on the banking system and the ex ante incentives these responses give to depositors. We focus primarily on system-wide runs, where depositors rush to withdraw their funds from all banks in the economy simultaneously. Argentina experienced such a run in the last two days of November 2001, with total deposits in the banking system falling by more than 2 billion (US) dollars, or nearly 3 percent, on the second day of the run alone. Such runs were a common occurrence in the United States in the late nineteenth and early twentieth centuries and have also occurred in recent times in several developing countries, including Brazil in 1990 and Ecuador in 1999.

We focus on policy interventions that are efficient ex post, once a run is underway. Our objective is to capture the effects of institutional features that prevent policymakers from being able to pre-commit to follow a particular course of action in the event of a crisis. Instead, the authorities intervene during the crisis and attempt to improve the allocation of resources given the situation at hand. We show how the anticipation of such an intervention can generate the conditions necessary for a self-fulfilling run to occur. In other words, when depositors anticipate that a run will be followed by an (ex post efficient) intervention, this fact may give them an ex ante incentive to participate in the run. In this sense, such interventions can have a destabilizing effect on the banking system.

JEL Codes: 
G21, G8
Topic: 
Financial Institutions
Topic: 
Policy Evaluation
Topic: 
Economic Modeling