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Pay, Stay, or Delay? How to Settle a Run

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Listed:
  • Rafael Matta
  • Enrico Perotti

Abstract

The classic view assumes banks prioritize immediate repayment by selling assets until default. We endogenize run frequency and study how general settlement rules trade off liquidity provision net of fire sale losses against induced run incentives. Panic runs are eliminated when all illiquid assets are sold under orderly resolution, but liquidity provision in a run is minimal. When suspension after some fire sales is followed by immediate liquidation, run frequency falls then rises in suspension delay. Thus, optimal suspension may require some sale of illiquid assets, in contrast to MMF norms. Ex post discretion induces excessive liquidation and more frequent runs. (JEL D8, G21)

Suggested Citation

  • Rafael Matta & Enrico Perotti, 2024. "Pay, Stay, or Delay? How to Settle a Run," The Review of Financial Studies, Society for Financial Studies, vol. 37(4), pages 1368-1407.
    • Handle: RePEc:oup:rfinst:v:37:y:2024:i:4:p:1368-1407.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhad084
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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