The Welfare Costs of Self‐Fulfilling Bank Runs

Elena Mattana and Ettore Panetti

Journal of Money, Credit and Banking, 2021, vol. 53, issue 2-3, 401-440

Abstract: We study the welfare implications of self‐fulfilling bank runs and liquidity requirements, in a growth model where banks, facing persistent possible runs, can choose in any period a run‐proof asset portfolio. In this framework, runs distort banks' insurance provision against idiosyncratic shocks, and liquidity requirements resolve this distortion at the cost of a credit tightening. Quantitatively, the welfare costs of self‐fulfilling bank runs are equivalent to a constant consumption loss of up to 2.3% of U.S. GDP. Liquidity requirements might increase these welfare costs by up to 2.4%.

Date: 2021
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https://doi.org/10.1111/jmcb.12695

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Working Paper: The Welfare Costs of Self-Fulfilling Bank Runs (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:53:y:2021:i:2-3:p:401-440

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