Deposit and Credit Reallocation in a Banking Panic: The Role of State- Owned Banks

Viral V. Acharya (), Abhiman Das (), Nirupama Kulkarni (), Prachi Mishra () and Nagpurnanand Prabhala ()
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Viral V. Acharya: New York University, Stern School of Business.
Abhiman Das: Indian Institute of Management Ahmedabad, India.
Nirupama Kulkarni: CAFRAL, Reserve Bank of India, Mumbai, India.
Prachi Mishra: Department of Economics and Isaac Center for Public Policy, Ashoka University
Nagpurnanand Prabhala: The Johns Hopkins University Carey Business School, Washington, DC.

No 140, Working Papers from Ashoka University, Department of Economics

Abstract: We study a bank run in India in which private bank branches experience sudden and considerable loss of deposits, which migrate to state-owned public sector banks (PSBs) that serve as safe havens. We trace the consequences of the deposit reallocation using bank branch-level balance sheet and firm-bank lending data. The flight to safety is not a flight to quality. Lending shrinks and credit quality improves in run banks, but worsens in PSBs receiving the flight-to-safety flows. The reallocation of resources is not efficient in the aggregate.

Pages: 71
Date: 2025-02-10
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