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Saving externality: when depositing too much breaks the bank

Author

Listed:
  • Agnese Leonello
  • Caterina Mendicino
  • Ettore Panetti
  • Davide Porcellacchia

Abstract

This article highlights a novel channel through which the level of deposits matters for bank fragility and efficiency. We augment a global-game model of bank runs with a consumption-saving choice that determines deposit size in the initial period. We derive two key results. First, depositors’ incentives to run increase with the amount of savings held as bank deposits. Second, a saving externality emerges because individual depositors fail to internalize the impact of their deposit decisions on the likelihood of a bank run. This leads to depositors’ over-saving and inefficient bank liquidity provision, as well as excessive bank fragility. Finally, we characterize the optimal policy to implement the efficient allocation.

Suggested Citation

  • Agnese Leonello & Caterina Mendicino & Ettore Panetti & Davide Porcellacchia, 2025. "Saving externality: when depositing too much breaks the bank," Review of Finance, European Finance Association, vol. 29(2), pages 501-530.
    • Handle: RePEc:oup:revfin:v:29:y:2025:i:2:p:501-530.
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    File URL: http://hdl.handle.net/10.1093/rof/rfae045
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    More about this item

    Keywords

    bank fragility; endogenous bank runs; liquidity provision; saving externality;
    All these keywords.

    JEL classification:

    • 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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