Asset-Side Bank Runs and Liquidity Rationing: A Vicious Cycle

Zongbo Huang ()
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Zongbo Huang: School of Management and Economics and Shenzhen Finance Institute, The Chinese University of Hong Kong, Shenzhen 518172, China

Management Science, 2025, vol. 71, issue 4, 3537-3557

Abstract: I analyze runs on credit lines in an infinite-horizon banking model, focusing on the strategic complementarity between bankers and credit line borrowers. Panic drawdowns by borrowers coupled with bank liquidity rationing can mutually reinforce each other, creating a vicious cycle. Using data from U.S. banks, I estimate the model and quantify the amplification effect arising from strategic complementarity. This amplification effect accounted for two-thirds of the contraction of bank credit during the 2008–2009 crisis. Moreover, I show that policies targeting borrowers have a crowding-in effect and can effectively contain credit contraction.

Keywords: credit lines; liquidity rationing; strategic complementarity; amplification (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:71:y:2025:i:4:p:3537-3557

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