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Why Do Bank Runs Look Like Panic? A New Explanation
Author(s) -
CHEN YEHNING,
HASAN IFTEKHAR
Publication year - 2008
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/j.1538-4616.2008.00126.x
Subject(s) - bank run , convertibility , economics , pareto principle , monetary economics , bank account , computer science , market liquidity , finance , payment , operations management , currency
This paper demonstrates that, even if depositors are fully rational and always choose the Pareto‐dominant equilibrium when there are multiple equilibria, a bank run may still occur when depositors' expectations on the bank's fundamentals do not change. More specifically, a bank run may occur when depositors learn that noisy bank‐specific information will be revealed, or when they learn that precise bank‐specific information will not be revealed. The results in this paper are consistent with the empirical evidence about bank runs. It also implies that suspension of convertibility can improve the efficiency of bank runs.