Who Can Tell Which Banks Will Fail?

Blickle, Kristian S.; Brunnermeier, Markus K.; Luck, Stephan

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Who Can Tell Which Banks Will Fail?

Abstract: We study the run on the German banking system in 1931 to study whether depositors anticipate which banks will fail. We find that deposits decline by around 20 percent during the run. There is an equal outflow of retail and non-financial wholesale deposits from both failing and surviving banks. In contrast, we find that interbank deposits decline almost exclusively for failing banks. Our evidence suggests that while regular depositors are uninformed, banks have precise information about which banks will fail. In turn, banks being informed allows the interbank market to continue providing liquidity even during times of severe financial distress.

JEL Classification: G01; G21; N20; N24;