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The Welfare Costs of Self‐Fulfilling Bank Runs
Author(s) -
MATTANA ELENA,
PANETTI ETTORE
Publication year - 2020
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/jmcb.12695
Subject(s) - market liquidity , welfare , asset (computer security) , distortion (music) , economics , monetary economics , portfolio , consumption (sociology) , business , finance , computer science , sociology , market economy , amplifier , computer network , social science , computer security , bandwidth (computing)
We study the welfare implications of self‐fulfilling bank runs and liquidity requirements, in a growth model where banks, facing persistent possible runs, can choose in any period a run‐proof asset portfolio. In this framework, runs distort banks' insurance provision against idiosyncratic shocks, and liquidity requirements resolve this distortion at the cost of a credit tightening. Quantitatively, the welfare costs of self‐fulfilling bank runs are equivalent to a constant consumption loss of up to 2.3% of U.S. GDP. Liquidity requirements might increase these welfare costs by up to 2.4%.