Self-fulfilling bank panics : how to avoid them ? an experimental study

The purpose of this paper is to verify experimentally the possibility and the degree of persistence of a self-fulfilling bank panic. Furthermore, we test various means to prevent or to curb it: the suspension of deposit convertibility, the "narrow banking" solution. We confirm the possibility of pure-panic bank runs as formalized by Diamond and Dybvig (1983). However, this situation remains rare. Partial and self-fulfilling bank runs represent a more general situation. That reinforces the idea of strong coordination failures as it was observed in the previous experimental literature. Panics are proved to be persistent phenomena which are difficult to prevent. However, it seems to be possible to curb them using a learning effect entailed by a temporary but enough long suspension of the deposit convertibility or using a narrow banking solution which enables banks to be more liquid.