Yorulmazer, Tanju (2003): Herd Behavior, Bank Runs and Information Disclosure.
Download (310Kb) | Preview
I develop a dynamic model of bank runs that allows me to study important phenomena such as the role of information externalities and herd behavior of depositors as a source of bank runs. I show that eliminating bank runs completely, even they can be generated by herd behavior of depositors, has costs. Furthermore, a deposit contract that allows for runs can achieve higher levels of depositor welfare than a contract that completely eliminates them. Since early liquidation of bank's assets is costly, a central bank that acts as a lender of last resort alleviates some of the costs associated with bank runs. Yet it cannot prevent runs on healthy banks in the absence of perfect information about the bank's asset quality. In those cases, a deposit contract, even with liquidity support from the central bank, cannot achieve the first-best efficient outcome. As a policy measure, any efforts to give market discipline a stronger role in achieving financial stability should be accompanied by transparency and disclosure of information on banks’ soundness and management of the crisis.
|Item Type:||MPRA Paper|
|Original Title:||Herd Behavior, Bank Runs and Information Disclosure|
|Subjects:||D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information; Mechanism Design
G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation
G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages
|Depositing User:||Tanju Yorulmazer|
|Date Deposited:||10. Jul 2008 02:07|
|Last Modified:||13. Feb 2013 17:38|
Alexander, William E., Jeffrey M. Davis, Liam P. Ebrill and Carl-Johan Lindgren, 1997, Systemic Bank Restructuring and Macroeconomic Policy, International Monetary Fund, Washington D.C., US.
Allen, Franklin and Douglas Gale, 1998, “Optimal Financial Crises”, Journal of Finance, 53, 1245-1283.
Allen, Franklin and Stephen Morris, 2001, ”Finance Applications of Game Theory” in Advances in Business Applications of Game Theory, K. Chatterjee and W. Samuelson, Eds. Kluwer Academic Press (forthcoming).
Bagehot, Walter, 1873, Lombard Street: A Description of the Money Market, London, H.S. King.
Berger, A., S. Davies and M. Flannery, 1998, ”Comparing Market and Regulatory Assessments of Bank Performance: Who Knows What When?”, Federal Reserve Board Working Paper, March.
Bhattacharya, Sudipto, Arnoud W.A. Boot and Anjan V. Thakor, 1998, ”The Economics of Bank Regulation”, Journal of Money, Credit and Banking, 30-4, 745-770.
Bikhchandani, Sushil, David Hirshleifer and Ivo Welch, 1992, ”A Theory of Fads, Fashion, Custom and Cultural Change as Informational Cascades”, Journal of Political Economy 100, 992-1026.
Brunnermeier, Markus K., 2001, Asset Pricing under Asymmetric Information: Bubbles, Crashes, Technical Analysis and Herding, Oxford University Press, Oxford, U.K.
Calomiris, Charles and Charles Kahn, 1991, ”The Role of Demandable Debt in Structuring Optimal Banking Arrangements”, American Economic Review, 81, 497-513.
Calomiris, Charles and Gary Gorton, 1991, ”The Origins of Banking Panics: Models, Facts and Bank Regulation”, in Financial Markets and Financial Crises edited by R.Glenn Hubbard, The University of Chicago Press, Chicago, US.
Caprio, Gerard Jr. and Daniela Klingebiel, 1996, ”Bank Insolvency: Cross-Country Experience” Working Paper no:1620, July, World Bank, Washington D.C., US.
Carlsson, H. and E. van Damme, 1993, ”Global Games and Equilibrium Selection”, Econometrica 61, 989-1018.
Chamley, Christophe and Douglas Gale, 1994, ”Information Revelation and Strategic Delay in a Model of Investment”, Econometrica 62, 1065-1085.
Chari, V.V. and Ravi Jagannathan, 1988, ”Banking Panics, Information and Rational Expectations Equilibrium”, Journal of Finance 43, 749-60.
Chen, Y., 1999, ”Banking Panics: The Role of the First-Come, First-Served Rule and Information Externalities”, Journal of Political Economy, 107(5), 946-968.
Dasgupta, A. (2000) ”Social Learning with Payoff Complementarities,” unpublished.
Demirguc-Kunt, Asli and Enrica Detragiache, 2000, ”Does Deposit Insurance Increase Banking Stability?”, Working Paper, January, International Monetary Fund, Washington D.C., US.
Diamond, Douglas W. and Philip Dybvig, 1983, ”Bank Runs, Deposit Insurance and Liquidity”, Journal of Political Economy, 91, 401-419.
Diamond, Douglas W. and Raghuram Rajan, 2001, ”Liquidity Shortages and Banking Crises”, mimeo, University of Chicago.
Freixas, Xavier, Curzio Giannini, Glenn Hoggarth and Farouk Soussa, 1999, ”Lender of Last Resort: A Review of the Literature”, Financial Stability Review, Bank of England, 7, 151-167.
Garcia, Gillian G.H., 2000, ”Deposit Insurance: Actual and Good Practices”, Occasional Paper no:197, International Monetary Fund, Washington D.C., US.
Garcia, Gillian and E. Plautz, 1988, The Federal Reserve: Lender of Last Resort, Ballinger, Cambridge, MA.
Giannini, Curzio, 1999, ”Enemy of None but a Common Friend of All? An International Perspective on the Lender of Last Resort Function”, Princeton Essays in International Finance, No: 214.
Goldstein, Itay and Ady Pauzner, 2002, ”Demand Deposit Contracts an the Probability of Bank Runs”, available at http://tau.ac.il/~pauzner.
Goodhart, Charles and D Shoenmaker, 1995, ”Should the Functions of Monetary Policy and Bank Supervision be Separated?”, Oxford Economic Papers, 39, 75-89.
Gorton, Gary, 1988, ”Banking Panics and Business Cycles”, Oxford Economic Papers, 40,751-781.
Gorton, Gary, 1985, ”Clearinghouses and the Origin of Central Banking in the United States”, Journal of Economic History, 45, 277-283.
Gorton, Gary and Donald Mullineaux, 1987, ”The Joint Production of Confidence: Endogenous Regulation and Nineteenth Century Commercial-Bank Clearinghouses”, Journal of Money Credit and Banking, 19, 457-468.
Gorton, Gary and Lixin Huang, 2002, ”Banking Panics and the Origin of Central Banking”, NBER Working Paper No:9137, Cambridge, MA,US.
Green, Edward J. and Ping Lin, 2003, ”Implementing Efficient Allocations in a Model of Financial Intermediation”, Journal of Economic Theory 109, 1-23.
Hoggarth, Glenn, Ricardo Reis and Victoria Saporta, 2001, ”Cost of Banking System Instability: Some Empirical Evidence”, Working Paper, Bank of England, London, UK.
Lindgren, Carl-Johan, Gillian Garcia and Matthew I. Saal, 1996, Bank Soundness and Macroeconomic Policy, International Monetary Fund, Washington D.C., US.
Lindgren, Carl-Johan, Thomas J.T. Balino, Charles Enoch, Anne-Marie Gulde, Marc Quintyn and Leslie Teo, 1999, ”Financial Sector Crisis and Restructuring: Lessons from Asia”, Occasional Paper no:188, International Monetary Fund, Washington D.C., US.
Morris, Stephen and Hyun Shin, 1998, ”Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks”, American Economic Review 88, 587-597.
Morris, Stephen and Hyun Shin, 2002, ”Global Games: Theory and Applications,” forthcoming in the Volume of the Eighth World Congress of the Econometric Society.
Neeman, Z. and G. Orosel, 1999, ”Herding and the Winner’s Curse in Markets with Sequential Bids,” Journal of Economic Theory 85, 91-121.
Postlewaite, Andrew and Xavier Vives, 1987, ”Bank Runs as an Equilibrium Phenomenon”, Journal of Political Economy, 95(3), 485-491.
Prati, A and G Schinasi, 1999, ”Financial Stability in European Economic and Monetary Union, mimeo.
Rochet, Jean-Charles and Xavier Vives, 2002, ”Coordination Failures and the Lender of Last Resort: Was Bagehot Right After All?”, mimeo.
Santomero, A and P Hoffman, 1998, ”Problem Bank Resolution: Evaluating the Options”, The Wharton School Financial Institutions Center Discussion Paper 98-05.
Saunders, Anthony and B.Wilson, 1996, ”Contagious Bank Runs: Evidence from the 1929-33 Period”, Journal of Financial Intermediation, 5(4), 409-423.
Schotter, Andrew and Tanju Yorulmazer, 2003, ”On the Severity of Bank Runs: An Experimental Study”, mimeo., New York University.
Smith, Lones and Peter Sorensen, 2000, ”Pathological Outcomes of Observational Learning,” Econometrica, 68(2), 371-398.
Sprague, Oliver, 1910, History of Banking Crises Under the National Banking System, U.S. Government Printing O