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Why Do Bank Runs Look Like Panic? A New Explanation

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  • YEHNING CHEN
  • IFTEKHAR HASAN

Abstract

This paper demonstrates that, even if depositors are fully rational and always choose the Pareto‐dominant equilibrium when there are multiple equilibria, a bank run may still occur when depositors' expectations on the bank's fundamentals do not change. More specifically, a bank run may occur when depositors learn that noisy bank‐specific information will be revealed, or when they learn that precise bank‐specific information will not be revealed. The results in this paper are consistent with the empirical evidence about bank runs. It also implies that suspension of convertibility can improve the efficiency of bank runs.

Suggested Citation

  • Yehning Chen & Iftekhar Hasan, 2008. "Why Do Bank Runs Look Like Panic? A New Explanation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(2‐3), pages 535-546, March.
    • Handle: RePEc:wly:jmoncb:v:40:y:2008:i:2-3:p:535-546
    DOI: 10.1111/j.1538-4616.2008.00126.x
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    References listed on IDEAS

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    1. Saunders, Anthony & Wilson, Berry, 1996. "Contagious Bank Runs: Evidence from the 1929-1933 Period," Journal of Financial Intermediation, Elsevier, vol. 5(4), pages 409-423, October.
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    6. Chen, Yehning & Hasan, Iftekhar, 2006. "The transparency of the banking system and the efficiency of information-based bank runs," Journal of Financial Intermediation, Elsevier, vol. 15(3), pages 307-331, July.
    7. Itay Goldstein & Ady Pauzner, 2005. "Demand–Deposit Contracts and the Probability of Bank Runs," Journal of Finance, American Finance Association, vol. 60(3), pages 1293-1327, June.
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    More about this item

    JEL classification:

    • 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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