Bank runs, fragility, and credit easing
BibTeX
@techreport{amador2021bank,
title={Bank runs, fragility, and credit easing},
author={Amador, Manuel and Bianchi, Javier},
year={2021},
institution={National Bureau of Economic Research}
}
Abstract
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.
My Notes
Diamond-Dybvig shows solvent banks vulnerable to self fulfilling runs,
This paper tries to put them into general equilibrium model.
Model
- Default is a strategic decisions. Limited commitment.
- Default causes:
- a lower productivity for the bank
- permanent financial exclusion $b’ = 0$
- Banks can choose mixed strategies.
- equilibrium might not exist (no fixed point) if return on capital $R^k$ too high.
- When there are two fixed points, the larger one violates No-Ponzi, while the smaller is unstable.
- So banks are allowed to randomize their decisions whne they are indifferent. (This makes the equiilbrium more tractable.)
- Also means that fraction $\phi$ can defaults and $1-\phi$ repay. (differnt from Kehoe-Levine)
- Borrowing contract adjusts in such a way that all the action happens at time period 0.
- Should the government intervene to ease credit? Depends on whether bank runs are because of bad fundamentals or self-fulfilling prophecies.