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Bank runs, welfare and policy implications

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  • Haibin Zhu

Abstract

This paper proposes a model in which bank runs are closely related to the state of the business cycle. The benchmark model shows that, in a market economy, there are welfare losses due to the existence of bank runs. Extensions of the model explore the welfare effects of various government policies. The results suggest that an interest-cap deposit insurance scheme is an efficient policy to prevent bank runs, while other policies, including the suspension of convertibility, a penalty on short-term deposits and full-coverage deposit insurance schemes, will all have adverse side effects.

Suggested Citation

  • Haibin Zhu, 2001. "Bank runs, welfare and policy implications," BIS Working Papers 107, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:107
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    References listed on IDEAS

    as
    1. Kaminsky, Graciela L. & Reinhart, Carmen M., 2000. "On crises, contagion, and confusion," Journal of International Economics, Elsevier, vol. 51(1), pages 145-168, June.
    2. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
    3. Curtis R. Taylor & Thomas D. Jeitschko, 2001. "Local Discouragement and Global Collapse: A Theory of Coordination Avalanches," American Economic Review, American Economic Association, vol. 91(1), pages 208-224, March.
    4. R. Glenn Hubbard, 1991. "Financial Markets and Financial Crises," NBER Books, National Bureau of Economic Research, Inc, number glen91-1.
    5. David Backus & Silverio Foresi & Liuren Wu, 2002. "Contagion in Financial Markets," Finance 0207009, University Library of Munich, Germany.
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    Cited by:

    1. Gert Schnabel, 2002. "Output trends and Okun's law," BIS Working Papers 111, Bank for International Settlements.
    2. Moheeput, Ashwin, 2008. "Financial Systems, Micro-Systemic Risks and Central Bank Policy: An Analytical Taxonomy of the Literature," Economic Research Papers 269854, University of Warwick - Department of Economics.
    3. Serge Jeanneau & Marian Micu, 2002. "Determinants of international bank lending to emerging market countries," BIS Working Papers 112, Bank for International Settlements.
    4. Moheeput, Ashwin, 2008. "Financial Systems, Micro-Systemic Risks and Central Bank Policy : An Analytical Taxonomy of the Literature," The Warwick Economics Research Paper Series (TWERPS) 856, University of Warwick, Department of Economics.

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    More about this item

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • 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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