Bank runs without sequential service

David Andolfatto (dxa1048@miami.edu) and Ed Nosal

No 2018-16, Working Papers from Federal Reserve Bank of St. Louis

Abstract: Banking models in the tradition of Diamond and Dybvig (1983) rely on sequential service to explain belief driven runs. But the run-like phenomena witnessed during the financial crisis of 2007-08 occurred in the wholesale shadow banking sector where sequential service is largely absent. This suggests that something other than sequential service is needed to help explain runs. We show that in the absence of sequential service runs can easily occur whenever bank-funded investments are subject to increasing returns to scale consistent with available evidence. Our framework is used to understand and evaluate recent banking and money market regulations.

JEL-codes: G01 G21 G28 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2018-07
New Economics Papers: this item is included in nep-ban and nep-mon
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Working Paper: Bank Runs without Sequential Service (2018)
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DOI: 10.20955/wp.2018.016

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