An Experimental Exploration of Self-Fulfilling Banking Panics: Their Occurrence, Persistence, and Prevention

Philippe Madiès
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Philippe Madiès: Université Pierre Mendès France–Grenoble 2

Journal of Business, 2006, vol. 79, issue 4, pages 1831-1866

Abstract: This article tests the possibility and the degree of persistence of self-fulfilling banking panics through an experimental protocol. Panics are proved to be persistent phenomena that are difficult to prevent. However, it seems possible to curb them through a learning effect caused by a temporary but sufficient suspension of the deposit availability, combined with a "narrow-banking" solution, which makes banks more liquid. Additionally, panic prevention requires a full deposit coverage to be effective. This suggests that the moral-hazard issue should not be tackled through a lower deposit coverage, especially in emerging countries' banking systems where depositors are likely to lose confidence.

Date: 2006
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