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Ettore Panetti

11 January 2022
WORKING PAPER SERIES - No. 2636
Details
Abstract
Does the level of deposits matter for bank fragility and efficiency? By augmenting a standard model of endogenous bank runs with a consumption-saving decision, we obtain two novel results. First, depositors’ incentives to run are a function of the level of savings held as bank deposits. Second, a saving externality emerges in that individual depositors do not internalize the effect of their saving decisions on the bank-run probability. As a result, the economy features an inefficient level of savings and bank liquidity provision as well as excessive bank fragility. These results are robust to different sources of bank fragility, as they emerge both when runs are panic- and fundamental-driven.
JEL Code
G01 : Financial Economics→General→Financial Crises
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation