Contagious Bank Runs and Committed Liquidity Support

Zhao Li () and Kebin Ma ()
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Zhao Li: Zhongnan University of Economics and Law, School of Finance, Wuhan 430073, P.R. China
Kebin Ma: Warwick Business School, University of Warwick, Coventry CV4 7AL, United Kingdom

Management Science, 2022, vol. 68, issue 12, 9152-9174

Abstract: In a crisis, regulators and private investors can find it difficult, if not impossible, to tell whether banks facing runs are insolvent or merely illiquid. We introduce such an information constraint into a global-games-based bank run model with multiple banks and aggregate uncertainties. The information constraint creates a vicious cycle between contagious bank runs and falling asset prices and limits the effectiveness of traditional emergency liquidity assistance programs. We explain how a regulator can set up committed liquidity support to contain contagion and stabilize asset prices even without information on banks’ solvency, rationalizing some recent developments in policy practices.

Keywords: committed liquidity support; global games; bank runs (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:68:y:2022:i:12:p:9152-9174

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