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Bank runs, prudential tools and social welfare in a global game general equilibrium model

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  • Ikeda, Daisuke

Abstract

Basel III features requirements on bank capital and liquidity along with disclosure requirements. I study these prudential tools by developing a general equilibrium model with bank runs in a global game framework, where leverage, liquidity, interest rates, and the probability of a banking crisis are all determined endogenously. With timely disclosure about bank assets, the unregulated economy has efficient liquidity but excessive leverage due to a pecuniary externality, warranting a leverage restriction. Delayed disclosure gives rise to bank risk shifting, making leverage even more excessive and liquidity insufficient, which warrants joint requirements on leverage and liquidity. Empirical predictions and policy implications are derived and discussed.

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  • Ikeda, Daisuke, 2024. "Bank runs, prudential tools and social welfare in a global game general equilibrium model," Journal of Financial Stability, Elsevier, vol. 72(C).
  • Handle: RePEc:eee:finsta:v:72:y:2024:i:c:s1572308924000214
    DOI: 10.1016/j.jfs.2024.101236
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    1. Daisuke Ikeda & Hidehiko Matsumoto, 2021. "Procyclical Leverage and Crisis Probability in a Macroeconomic Model of Bank Runs," IMES Discussion Paper Series 21-E-01, Institute for Monetary and Economic Studies, Bank of Japan.
    2. Hibiki Ichiue & Jean-Guillaume Sahuc & Yasin Mimir & Jolan Mohimont & Kalin Nikolov & Olivier de Bandt & Sigrid Roehrs & Valério Scalone & Michael Straughan & Bora Durdu, 2022. "Assessing the Impact of Basel III: Evidence from Structural Macroeconomic Models," Working Papers hal-04159816, HAL.
    3. Porcellacchia, Davide & Sheedy, Kevin D., 2024. "The macroeconomics of liquidity in financial intermediation," Working Paper Series 2939, European Central Bank.
    4. Vo, Quynh-Anh, 2021. "Interactions of capital and liquidity requirements: a review of the literature," Bank of England working papers 916, Bank of England.
    5. Ikeda, Daisuke, 2024. "Bank runs, prudential tools and social welfare in a global game general equilibrium model," Journal of Financial Stability, Elsevier, vol. 72(C).
    6. Ryo Kato & Takayuki Tsuruga, 2022. "Pecuniary externalities, bank overleverage, and macroeconomic fragility," International Journal of Economic Theory, The International Society for Economic Theory, vol. 18(4), pages 554-577, December.
    7. Anil K Kashyap & Dimitrios P. Tsomocos & Alexandros P. Vardoulakis, 2024. "Optimal Bank Regulation in the Presence of Credit and Run Risk," Journal of Political Economy, University of Chicago Press, vol. 132(3), pages 772-823.

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    More about this item

    Keywords

    Bank runs; Global games; Capital and liquidity requirements; Disclosure requirements; Risk shifting; Pecuniary externality; Risk migration;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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