Incomplete Solvency Information as a Trigger for Systemwide Bank Runs

Sangkyun Park
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Sangkyun Park: Retired from The U.S. Office of Management and Budget, USA

Journal of Economic Analysis, 2025, vol. 4, issue 2, 73-90

Abstract: This paper presents a model of bank runs and evaluates relevant policy tools. The model is founded on the historical pattern of banking panics, involving an economic boom, an adverse shock, prominent bank failures, and runs on both insolvent and solvent banks. The model analyzes various ways in which solvency information affects the likelihood of systemwide bank runs. An interesting result is that partial bank-specific information can be worse than no bank-specific information. The model can also explain runs driven by liquidity concern based on incomplete solvency information. The main policy implication derived from the model and the evaluation of policy tools is that policy actions to contain a financial crisis should incorporate weeding out insolvent institutions and assuring the solvency of remaining institutions.

Keywords: Bank Runs; Financial Crisis; Financial Contagion; Lender of Last Resort; Solvency Information (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:bba:j00001:v:4:y:2025:i:2:p:73-90:d:410

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