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Working Paper
Preventing Bank Runs
Sultanum, Bruno; Nosal, Ed; Andolfatto, David (2014-09-01)
Diamond and Dybvig (1983) is commonly understood as providing a formal rationale for the existence of bank-run equilibria. It has never been clear, however, whether bank-run equilibria in this framework are a natural byproduct of the economic environment or an artifact of suboptimal contractual arrangements. In the class of direct mechanisms, Peck and Shell (2003) demonstrate that bank-run equilibria can exist under an optimal contractual arrangement. The difficulty of preventing runs within this class of mechanism is that banks cannot identify whether withdrawals are being driven by ...
Working Paper Series , Paper WP-2014-19

Working Paper
The Effect of Safe Assets on Financial Fragility in a Bank-Run Model
Elamin, Mahmoud; Ahnert, Toni (2014-12-22)
Risk-averse investors induce competitive intermediaries to hold safe assets, thereby lowering the probability of a run and reducing financial fragility. We revisit Goldstein and Pauzner (2005), who obtain a unique equilibrium in the banking model of Diamond and Dybvig (1983) by introducing risky investment and noisy private signals. We show that, in the optimal demand-deposit contract subject to sequential service, banks hold safe assets to insure investors against investment risk. Consequently, fewer investors withdraw prematurely, which reduces the probability of a bank run. Safe asset ...
Working Papers (Old Series) , Paper 1437

Journal Article
Opinion: Why Do Bank Runs Happen?
Athreya, Kartik B. (2023-04)
The first half of 2023 has reminded us once again that banks are not immune from failure. In early March, Silicon Valley Bank (SVB) suffered a run on deposits and quickly collapsed. Its closure was followed by the failure of Signature Bank, a smaller bank, two days later. And even more recently, regulators exerted considerable effort to arrange the sale of First Republic Bank to a larger bank. The Fed was responsible for supervising and regulating SVB, and it recently issued its report examining what went wrong. I encourage you to take a look.
Econ Focus , Volume 23 , Issue 2Q , Pages 32

Working Paper
A Macroeconomic Model with Financial Panics
Gertler, Mark; Kiyotaki, Nobuhiro; Prestipino, Andrea (2017-12-15)
This paper incorporates banks and banking panics within a conventional macroeconomic framework to analyze the dynamics of a financial crisis of the kind recently experienced. We are particularly interested in characterizing the sudden and discrete nature of the banking panics as well as the circumstances that makes an economy vulnerable to such panics in some instances but not in others. Having a conventional macroeconomic model allows us to study the channels by which the crisis affects real activity and the effects of policies in containing crises.
International Finance Discussion Papers , Paper 1219

Discussion Paper
How (Un-)Informed Are Depositors in a Banking Panic? A Lesson from History
Blickle, Kristian S.; Brunnermeier, Markus K.; Luck, Stephan (2022-02-17)
How informed or uninformed are bank depositors in a banking crisis? Can depositors anticipate which banks will fail? Understanding the behavior of depositors in financial crises is key to evaluating the policy measures, such as deposit insurance, designed to prevent them. But this is difficult in modern settings. The fact that bank runs are rare and deposit insurance universal implies that it is rare to be able to observe how depositors would behave in absence of the policy. Hence, as empiricists, we are lacking the counterfactual of depositor behavior during a run that is undistorted by the ...
Liberty Street Economics , Paper 20220217

Discussion Paper
Why Do Banks Fail? Three Facts About Failing Banks
Correia, Sergio A.; Luck, Stephan; Verner, Emil (2024-11-21)
Why do banks fail? In a new working paper, we study more than 5,000 bank failures in the U.S. from 1865 to the present to understand whether failures are primarily caused by bank runs or by deteriorating solvency. In this first of three posts, we document that failing banks are characterized by rising asset losses, deteriorating solvency, and an increasing reliance on expensive noncore funding. Further, we find that problems in failing banks are often the consequence of rapid asset growth in the preceding decade.
Liberty Street Economics , Paper 20241121

Journal Article
What makes large bank failures so messy and what should be done about it?
Morgan, Donald P.; Yorulmazer, Tanju; Santos, Joao A. C.; McAndrews, James J. (2014-12)
This study argues that the defining feature of large and complex banks that makes their failures messy is their reliance on runnable financial liabilities. These liabilities confer liquidity or money-like services that may be impaired or destroyed in bankruptcy. To make large bank failures more orderly, the authors recommend that systemically important bank holding companies be required to issue ?bail-in-able? long-term debt that converts to equity in resolution. This reassures holders of uninsured liabilities that their claims will be honored in resolution, making them less likely to run. In ...
Economic Policy Review , Issue Dec , Pages 229-244

Discussion Paper
Why Do Banks Fail? The Predictability of Bank Failures
Correia, Sergio A.; Luck, Stephan; Verner, Emil (2024-11-22)
Can bank failures be predicted before they happen? In a previous post, we established three facts about failing banks that indicated that failing banks experience deteriorating fundamentals many years ahead of their failure and across a broad range of institutional settings. In this post, we document that bank failures are remarkably predictable based on simple accounting metrics from publicly available financial statements that measure a bank’s insolvency risk and funding vulnerabilities.
Liberty Street Economics , Paper 20241122

Journal Article
The FDIC Studies “Options for Deposit Insurance Reform”
Neely, Christopher J. (2023-06-08)
The FDIC favors targeted coverage of large accounts used for business payments when considering deposit insurance reform.
Economic Synopses , Issue 14 , Pages 2 pages

Discussion Paper
Banking System Vulnerability: 2022 Update
Crosignani, Matteo; Eisenbach, Thomas M.; Fringuellotti, Fulvia (2022-11-14)
To assess the vulnerability of the U.S. financial system, it is important to monitor leverage and funding risks—both individually and in tandem. In this post, we provide an update of four analytical models aimed at capturing different aspects of banking system vulnerability with data through 2022:Q2, assessing how these vulnerabilities have changed since last year. The four models were introduced in a Liberty Street Economics post in 2018 and have been updated annually since then.
Liberty Street Economics , Paper 20221114

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