Bank Runs, Fragility, and Regulation

Manuel Amador and Javier Bianchi

No 804, Working Papers from Federal Reserve Bank of Minneapolis

Abstract: We examine banking regulation in a macroeconomic model of bank runs. We construct a general equilibrium model where banks may default because of fundamental or self-fulfilling runs. With only fundamental defaults, we show that the competitive equilibrium is constrained efficient. However, when banks are vulnerable to runs, banks’ leverage decisions are not ex-ante optimal: individual banks do not internalize that higher leverage makes other banks more vulnerable. The theory calls for introducing minimum capital requirements, even in the absence of bailouts.

Keywords: Self-fulfilling bank runs; Banking crises; Macroprudential policy (search for similar items in EconPapers)
JEL-codes: E32 E44 E58 G01 G21 G33 (search for similar items in EconPapers)
Date: 2024-04-11
New Economics Papers: this item is included in nep-dge and nep-mon
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Working Paper: Bank Runs, Fragility, and Regulation (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmwp:98383

DOI: 10.21034/wp.804

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