Can a Bank Run Be Stopped? Government Guarantees and the Run on Continental Illinois

Mark Carlson and Jonathan Rose

No 2016-3, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: This paper analyzes the run on Continental Illinois in 1984. We find that the run slowed but did not stop following an extraordinary government intervention, which included the guarantee of all liabilities of the bank and a commitment to provide ongoing liquidity support. Continental's outflows were driven by a broad set of US and foreign financial institutions. These were large, sophisticated creditors with holdings far in excess of the insurance limit. During the initial run, creditors with relatively liquid balance sheets nevertheless withdrew more than other creditors, likely reflecting low tolerance to hold illiquid assets. In addition, smaller and more-distant creditors were more likely to withdraw. In the second and more drawn out phase of the run, institutions with relative large exposures to Continental were more likely to withdraw, reflecting a general unwillingness to have an outsized exposure to a troubled institution even in the absence of credit risk. Finally, we show that the concentration of holdings of Continental's liabilities was a key dynamic in the run and was importantly linked to Continental's systemic importance.

Keywords: Bank runs; deposit guarantee; deposit insurance; financial crisis (search for similar items in EconPapers)
JEL-codes: G01 G21 H12 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2016-02-03
New Economics Papers: this item is included in nep-his and nep-ias
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http://www.federalreserve.gov/econresdata/feds/2016/files/2016003pap.pdf Full text (application/pdf)
http://dx.doi.org/10.17016/FEDS.2016.003 DOI (application/pdf)

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Working Paper: Can a bank run be stopped? Government guarantees and the run on Continental Illinois (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2016-03

DOI: 10.17016/FEDS.2016.003

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