Savings, Efficiency and Bank Runs

Agnese Leonello, Caterina Mendicino, Ettore Panetti and Davide Porcellacchia

No 19276, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Does the level of deposits affect bank fragility and efficiency? By augmenting a standard model of endogenous bank runs with a consumption-saving decision, we derive two key findings. First, depositors' incentives to run increase with the amount of savings held as bank deposits. Second, a saving externality emerges since individual depositors do not internalize the impact of their savings on the likelihood of a bank run. This leads to an economy featuring over-saving and inefficient bank liquidity provision, as well as excessive bank fragility. Finally, we characterize the optimal policy to implement the efficient allocation.

JEL-codes: G01 G21 G28 (search for similar items in EconPapers)
Date: 2024-07
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Working Paper: Savings, efficiency and bank runs (2022)
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