Why Do Bank Runs Look Like Panic? A New Explanation

Yehning Chen and Iftekhar Hasan

Journal of Money, Credit and Banking, 2008, vol. 40, issue 2-3, pages 535-546

Abstract: This paper demonstrates that, even if depositors are fully rational and always choose the Pareto-dominant equilibrium when there are multiple equilibria, a bank run may still occur when depositors' expectations on the bank's fundamentals do not change. More specifically, a bank run may occur when depositors learn that noisy bank-specific information will be revealed, or when they learn that precise bank-specific information will not be revealed. The results in this paper are consistent with the empirical evidence about bank runs. It also implies that suspension of convertibility can improve the efficiency of bank runs. Copyright (c)2008 The Ohio State University.

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