bank runs liquidity costs and investment distortions abstract in this paper we extend the diamond and dybvig 1983 model of intermediation to study further the conditions under which bank runs can occur and to consider how private parties might adjust to the existence of bank run equilibria we provide weaker necessary conditions for runs we then characterize how banks respond to the possibility of runs in their design of deposit contracts and investment decisions banks might choose to offer contracts that prevent runs but under some conditions the second best contracts will involve accepting some risk of runs in order to achieve higher expected returns from their investments

the assessment money and banking theory and evidence this issue of the oxford review is concerned with money and banking the articles in the issue provide a comprehensive overview of recent developments in the literature they systematically evaluate both the theoretical and empirical literature on banks the monetary transmission mechanism the operation of financial systems and bank regulation both in a domestic and an international context does money matter has been a favourite question posed by academic economists for several decades while the question has not changed the answer has during the 1950s and 60s the conventional view was that it does matter during the 1970s and 80s the influence of monetary policy on real as opposed to inflationary developments came to be increasingly questioned the consensus in the 1990s has swung back a few decades to the view that money does matter a new twist to the story which did not feature prominently in the 1950s and 60s debate is that banks as well as money matter of course there were several authors such as gurley and shaw 1960 who pointed to the importance of banks in the monetary transmission mechanism however it is really only in the last decade that economic theorists have turned their attention to the rationale for and the special role of banks the irony of this is that the theoretical justification for banks is appearing just at the moment when many commentators point to the demise of banks in the face of such close substitutes as corporate bond markets money market funds and contingent securities

external discipline and financial stability abstract the paper examines the costs and benefits of external discipline dollarization foreign short term debt from the point of view of the stability of the financial system of an emergent ldc economy external discipline solves the time inconsistency problem of central bank policy to help banks in trouble but at the cost of excessive liquidation of projects the latter may be quite important when the danger of coordination failure of investors is large

banking panics information and rational expectations equilibrium this paper shows that bank runs can be modeled as an equilibrium phenomenon we demonstrate that some aspects of the intuitive story that bank runs start with fears of insolvency of banks can be rigorously modeled if individuals observe long lines at the bank they correctly infer that there is a possibility that the bank is about to fail and precipitate a bank run however bank runs occur even when no one has any adverse information extra market constraints such as suspension of convertibility can prevent bank runs and result in superior allocations banking panics were a recurrent phenomenon in the united states until the 1930s they have re emerged as a source of public concern and much theoretical research recently in this paper we provide an information theoretic rationale for bank runs the traditional story is that contagion is an important aspect of bank runs the idea seems to be that when the general public observes large withdrawals from the banking system fears of insolvency grow resulting in even larger withdrawals of deposits in our model some individuals withdraw because they get information that future returns are likely to be low uninformed individuals observing this also have an incentive to liquidate their investments in addition some individuals need to withdraw deposits for other than informationally based reasons thus if the random realization of such a group of individuals is unusually large then the uninformed individuals will be misled and will precipitate a run on the bank the technology is such that a large volume of withdrawals involves liquidation costs consequently runs on the bank do impose social costs a mechanism that may reduce these costs in our model is to suspend convertibility if withdrawals are high however those individuals who need to withdraw their assets for liquidity reasons are worse off ex post our model provides a rationalization for restrictions in demand deposits that were widespread prior to 1929 friedman and schwartz 7 suggest that restrictions of payments ensured

understanding bank runs the importance of depositor bank relationships and networks we use a unique new database to examine micro depositor level data for a bank that faced a run we use minute by minute depositor withdrawal data to understand the effectiveness of deposit insurance the role of social networks and the importance of bank depositor relationships in influencing depositor propensity to run we employ methods from the epidemiology literature which examine how diseases spread to estimate transmission probabilities of depositors running and the significant underlying factors we find that deposit insurance is only partially effective in preventing bank runs further our results suggest that social network effects are important but are mitigated by other factors in particular the length and depth of the bank depositor relationship depositors with longer relationships and those who have availed of loans from a bank are less likely to run during a crisis suggesting that cross selling acts not just as a revenue generator but also as a complementary insurance mechanism for the bank finally we find there are long term effects of a solvent bank run in that depositors who run do not return back to the bank our results help understand the underlying dynamics of bank runs and hold important policy implications

the effects of human resource management practices on productivity a study of steel finishing lines the authors investigate the productivity effects of innovative employment practices using data from a sample of thirty six homogeneous steel production lines owned by seventeen companies the productivity regressions demonstrate that lines using a set of innovative work practices which include incentive pay teams flexible job assignments employment security and training achieve substantially higher levels of productivity than do lines with the more traditional approach which includes narrow job definitions strict work rules and hourly pay with close supervision their results are consistent with recent theoretical models which stress the importance of complementarities among work practices

bank runs and institutions the perils of intervention we study ex post efficient policy responses to a run on the banking system and the ex ante incentives these responses create we show that the efficient response to a run is typically not to freeze all remaining deposits since doing so imposes heavy costs on some individuals instead once a run is underway benevolent government institutions would allow additional deposit withdrawals placing further strain on the banking system when depositors anticipate these extra withdrawals their incentive to participate in the run increases in fact ex post efficient interventions can generate the conditions necessary for a self fulfilling run to occur jel g21 g8

pre play research in a model of bank runs se estudia un modelo de corrida bancaria en el que los depositantes no llegaron a un consenso sobre la accion a elegir pero pueden informarse acerca de las intenciones de los otros jugadores la propiedad de equilibrio indeterminado reaparece en el juego con adquisicion de informacion en el escenario bajo analisis el equilibrio con niveles positivos de adquisicion de informacion resulta en mayores probabilidades de quiebra del banco la correlacion en las senales aumenta el espacio de parametros para el cual existen equilibrios con niveles positivos de adquisicion de informacion y mayor probabilidad de quiebra del banco

measuring banks liquidity risk an option pricing approach abstract this paper proposes a new approach to evaluating banks liquidity needs which is not only well grounded theoretically but is also easy to apply practically within the framework of a global game with imperfect information we first establish a boundary condition for bank runs and show that there exists a unique nash equilibrium for bank runs using the option pricing approach we then obtain a closed form formula for the value of bank equity with both run risk and insolvency risk finally a bank s optimal liquidity ratio is derived by maximizing the value of bank equity using data on chinese listed banks we show that the deviation of the actual liquidity ratio from the optimal liquidity ratio in a bank represents a robust proxy for its liquidity risk an increased liquidity shortfall leads to worsening liquidity problems and this is particularly pronounced when the liquidity shortfall is high

models of banking instability a partial review of the literature abstract this paper critically examines the theoretical literature on banking instability that has followed diamond and dybvig 1983 it explores the extent to which it a explains banking instability within a theoretical context in which financial intermediaries improve on unintermediated markets and b justifies government involvement in the financial intermediation industry it suggests that the literature has yet to provide a satisfactory theoretical basis for banking instability as such since the intermediaries which arise from it are peculiar mutual funds that bear little resemblance to real world banks in addition the paper challenges the widespread belief that this literature provides a sound foundation for government involvement in the industry it suggests that arguments for government intervention are open to objection on various grounds the most important one being that they are inconsistent with the existence of properly motivated financial intermediation in these models

regulating banks through market discipline a survey of the issues abstract the interest in the application of market discipline to regulate the financial industry has boomed recently due to the proposed new capital accord this paper reviews the potential role market discipline can play in financial regulation we start with a discussion of the rationale for financial regulation and with a brief history of the current regulatory mechanisms next a definition of market discipline as a regulatory mechanism is advanced we evaluate the disciplining power various market participants have finally we argue that more external risk management disclosure is a condition sine qua non in order to enable market discipline as a regulatory mechanism in this respect the basle committee has taken the right approach

in which context is the option clause desirable the option clause is a contractual device from free banking experiences meant to prevent banknote redemption duels it has been used within the diamond and dybvig j pol econ 91 401 419 1983 framework to suggest that very simple contractual solutions can act as an alternative to deposit insurance this literature has however been ambiguous on whether the option clause can replace deposit insurance outside of those two contexts it will be argued that the theoretical clause does not generally affect the likelihood that a solvent bank goes bankrupt because of a bank run as empirical evidence suggests it is already near null and that the exercise of the clause will have the effect of diminishing the size of creditor claims on bank assets because it exacerbates the agency problem of bank debt it will therefore be argued that the clause is only desirable in a free banking systems that are historically devoid of bank runs in the first place and have other means of managing debt related agency problems and b under the unrealistic assumption that bank runs are self fulfilling prophecies it will be argued that the agency problem of bank debt makes the option clause undesirable outside of free banking systems

bank liquidity and stability in an overlapping generations model in an infinitely repeated version of the diamond and dybvig 1983 model intergenerational transfers enable a bank to achieve interest rate smoothing and to provide depositors with liquidity insurance without diamond and dybvig s assumption of no side trades the bank is subject to runs that may result from either excessive withdrawals or the lack of new deposits the latter cause which cannot occur in diamond and dybvig s one generation model implies that suspension of convertibility may not prevent bank runs government intervention may be necessary to maintain bank stability article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

impact of information technology capital on firm scope and performance the role of asset characteristics this research draws on transaction cost and resource based theory to examine how information technology it capital moderates the relationship between different types of assets and firm scope both vertical integration and diversification the analysis suggests that it capital enables firms with narrowly valuable assets to be less vertically integrated and less diversified and enables firms with broadly valuable assets to be more vertically integrated and more diversified the moderating influence of it capital on the relationship between different types of assets and firms vertical and product market scope is consistent with transaction cost as well as resource based traditions abstract from author

a model of financial crises in emerging markets recent events in mexico asia russia and brazil have underscored that a satisfactory explanation of financial crises in emerging markets remains elusive not too long ago the prevailing view was that crises were the inevitable outcome of ongoing fiscal imbalances coupled with fixed exchange rates but this first generation view pioneered by krugman 1979 has fallen out of fashion because in many crises the crucial fiscal disequilibria were absent and as obstfeld 1994 has argued currency crises have sometimes occurred even though central banks had more than enough resources to prevent them witness much of europe in the early 1990s obstfeld put forward a second generation view in which central banks may decide to abandon an exchange rate peg when the unemployment costs of defending it become too large this new perspective implied that crises could be driven by self fulfilling expectations since the costs of defending the peg may themselves depend on anticipations that the peg will be maintained but obstfeld s emphasis on mounting unemployment and domestic recession while appropriate for the erm 1992 crisis was at odds with the facts in mexico in 1994 and east asia in 1997 asian

a model of the interactions between banking crises and currency crises abstract a second generation model of currency crises is combined with a standard banking model in a pegged exchange rate regime after funds have been committed to the banks news arrives about the quality of the banks assets and about the exchange rate fundamentals a run on the banks may cause a currency crisis or vice versa there are multiple equilibria with either twin crises or no crisis depending on depositors expectations of other depositors actions suspension of deposit convertibility can prevent a speculative attack on the currency but last resort lending to solvent banks can induce one

contagion and risk sharing on the inter bank market abstract increasing inter bank lending has an ambiguous impact on financial stability using a computational model with endogenous bank behavior and interest rates we identify the conditions under which inter bank lending promotes stability through risk sharing or provides a channel through which failures may spread in response to large economy wide shocks more inter bank lending relationships worsen systemic events for smaller shocks the opposite effect is observed as such no inter bank market structure maximizes stability under all conditions in contrast deposit insurance costs are always reduced under greater numbers of inter bank lending relationships a range of regulations are considered to increase system stability

the market valuation effects of reserve regulation abstract we demonstrate that the financial market s reaction to changes in reserve regulation implies that reserve requirements are an excise tax on banking activities changes in reserve requirements do not influence yields on treasury securities or returns on broad based portfolios of nonfinancial stocks and thus do not impound new information about monetary policy moreover changes in reserve requirements have an impact on nonbank financial firms that is opposite in sign to that of banks this suggests that reserve requirements shift the locus of some financial activities from the banking sector to the nonbank sector of the financial system

can short term capital controls promote capital inflows abstract in an economy a la diamond and dybvig j polit econ 91 3 1983 401 we present an example in which foreign lenders find it profitable to invest in an emerging market if and only if the emerging market government imposes taxes on short term capital inflows this implies that capital controls that are effective in reducing the vulnerability of emerging markets to financial crises may increase the volume of capital inflows

unique equilibrium in a model of self fulfilling currency attacks even though self fulfilling currency attacks lead to multiple equilibria when fundamentals are common knowledge we demonstrate the uniqueness of equilibrium when speculators face a small amount of noise in their signals about the fundamentals this unique equilibrium depends not only on the fundamentals but also on financial variables such as the quantity of hot money in circulation and the costs of speculative trading in contrast to multiple equilibrium models our model allows analysis of policy proposals directed at curtailing currency attacks

banking panics and policy responses we study how banking panics unfold in av ersion of the diamond and dybvig 1983 model with limited commitment as is well known the banking authority could eliminate the possibility of a run on the banking system by committing to suspend payments to depositors if a run were to start once a run is under way however the banking authority will choose to reschedule rather than suspend payments we construct equilibria in which depositors run on the banking system with positive probability and we show that an equilibrium bank run in this setting is necessarily partial with only some depositors participating we also show that a run naturally occurs in waves with each wave of withdrawals prompting a further policy response from the banking authority the number of waves that occur in equilibrium is stochastic and can be arbitrarily large

the effects of group size and income on contributions to the corporation for public broadcasting this paper examines the extent to which individual contributions to public television are explained by the size of the audience which receives the individual station s television signal it also incorporates the effects of income on contributions to public television in order to assess the combined effects of income and group size on contributions to public goods

the role of non transparency in a currency crisis model abstract this paper extends the work by morris and shin am econom rev 88 1998 587 597 where multiple equilibria in the self fulfilling currency attack models can be reduced to a unique equilibrium when agents observe fundamentals privately with small errors we find that under a more general specification with realistic parameters noisy private observations are generally insufficient to prevent the multiplicity of equilibria the pivotal role played by the transparency of fundamentals policies in currency crisis is also examined surprisingly transparency may trigger rather than eliminate currency crises when fundamentals are relatively healthy our results may be relevant to research in other coordination problems

should bank runs be prevented abstract this paper extends diamond and dybvig s model j political economy 91 1983 401 to a framework in which bank assets are risky there is aggregate uncertainty about the demand for liquidity in the population and some individuals receive a signal about bank asset quality others must then try to deduce from observed withdrawals whether an unfavorable signal was received by this group or whether liquidity needs happen to be high in this environment both information induced and pure panic runs will occur however banks can prevent them by designing the deposit contract appropriately it is shown that in some cases it is optimal for the bank to prevent runs but there are situations where the bank run allocation may be welfare superior

measuring customer relationships the case of the retail banking industry arguing that gaap is ill suited for estimating the future profitability of intangibles the accounting literature e g kaplan and norton 1996 lev 2001 has recently proposed alternative measurement models these models view intangibles as composed of a set of fundamental business activities and use multiple financial and nonfinancial metrics causally interlinked to profits to represent this view using a unique and proprietary cross sectional data set of the retail banking industry we provide some of the first tests on the empirical validity of such measurement models we characterize the core deposit intangible an important retail banking intangible representing a bank s relationships with its customers using financial and nonfinancial metrics on price service customer usage and customer satisfaction we find that the metrics do not individually predict future earnings but gain individual significance in a collective setting increasing the predictive power substantially we argue that this result occurs because the activities underlying the measures are causally interlinked to profits and explicitly illustrate these linkages with a structural path model our measurement model also predicts significant interactive effects in the way our measures are informative about future profits and we document such effects not just among the individual measures but also across the measures and environmental factors such as the bank s strategy in sum our measurement model illustrates the key drivers measures and interactions in retail banking customer relationships

rational herding in financial economics abstract this paper briefly describes recent papers on the economics of rational herding in financial markets some models can predict perfect herding in which rational agents all act alike without any countervailing force such herding typically arises either from direct payoff externalities negative externalities in bank runs positive externalities in the generation of trading liquidity or in information acquisition principal agent problems based on managerial desire to protect or signal reputation or informational learning cascades the paper also provides a few pointers to related literature and suggests issues to be addressed in future research

employment horizon and the choice of performance measures empirical evidence from annual bonus plans of loss making entities we examine the extent to which employment horizon concerns affect the relative emphasis on financial versus nonfinancial performance measures in annual bonus plans we argue that managers of loss making firms are likely to voluntarily or forcibly depart in the near future and consequently have a shorter employment horizon loss making firms then need to increase the emphasis on forward looking nonfinancial performance measures to motivate long term effort of their managers thus we hypothesize that the emphasis on nonfinancial performance measures is greater in loss making than in profitable firms even after controlling for the informativeness of earnings we find consistent support for our hypothesis using different archival survey and field data sources and various proxies for short employment horizon and the emphasis on nonfinancial performance measures

banks debt maturity and financial crises abstract we develop a model in which the maturity of external debt of banks their level of international reserves and the term structure of interest rates are jointly determine self fulfilling runs may occur and banks take this possibility into account when choosing the structure of their assets and liabilities if the probability of a run is sufficiently small banks will deliberately choose an illiquid asset liability position and expose themselves to a run in that case short term debt will be cheaper than long term debt and the maturity structure of foreign debt will depend on attitudes towards risk

bank runs in emerging market economies evidence from turkey s special finance houses recent banking crises in emerging market countries have renewed debates about deposit insurance because insurance erodes banks incentives to manage risks prudently some argue that its elimination would improve bank stability yet eliminating insurance could be de stabilizing if it recreates risks of self fulfilling runs this paper examines dynamics of depositor behavior during a set of runs on turkey s special finance houses an uninsured sub sector of islamic banks detailed data on withdrawals are analyzed in a vector autoregressive framework that enables us to distinguish between informational and self fulfilling elements of runs we found that both types of dynamics were at work during the runs suggesting a role for deposit insurance judiciously used in ruling out expectational problems that fuel tendencies to run

uncertain liquidity and interbank contracting we study a version of the diamond and dybvig journal of political economy 1983 91 401 419 model where banks would like to obtain insurance against shocks on returns on liquid assets through an interbank borrowing and lending program we show that if investments in liquid assets and their realized returns are private information to individual banks the first best allocation is not incentive compatible we then characterize the second best interbank contract

demand for environmental goods evidence from voting patterns on california initiatives this article studies voting behavior on 16 environmental ballot propositions in california in order to characterize the demand for environmental goods the environment is found to be a normal good for people with mean incomes but some environmental goods are inferior for those with high incomes at least when supplied collectively an important price of environmental goods is reduced income in the construction farming forestry and manufacturing industries income and price can explain most of the variation in voting there is little need to introduce preference variables such as political ideology

bank runs as an equilibrium phenomenon a standard demand deposit contract in which individuals are entitled to their full deposit at any time provided the bank is solvent is analyzed in a context in which there are no exogenous events on which agents condition their behavior and a unique equilibrium involving a bank run with positive probability is shown to exist

the efficiency of self regulated payments systems learning from the suffolk system this paper analyzes the operation of the suffolk system an interbank note clearing network operating throughout new england from the 1820s through the 1850s banks made markets in each other s notes at par which allowed new england to avoid discounting of bank notes in trade privately enforced regu lations prevented free riding in the form of excessive risk taking observers of the suffolk system have been divided some emphasized the stability and effi these arrangements others argued that the arrangements were motivated by rent seeking on the part of boston banks and were primarily coervice and exploitative in the neighboring mid atlantic states regulations limited the potential for developing a regional clearing system centered in new york city on the model of the suffolk system this difference makes it possible to compare the performance of banks across regulatory regimes to judge the relative merits of the sanguine and jaundiced views of the suffolk system evidence supports the sanguine view new england s banks were able to issue more notes and these notes traded at uniform and low discount rates compared to those of other banks an examination of the balance sheets and stock returns of boston and new york city banks indicates that the stock market perceived that bank lending produced less risk for bank debt holders in boston than in new york the benefits of the system extended outside of boston peripheral new england banks displayed high propensities to issue notes and wer able to maintain low specie reserves boston banks did not show high profit rates or high ratios of market to book values of equity thus there is no evidence that boston banks extracted rents from their control of the payments system this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item

sources of panics evidence from the weekly data abstract we use weekly data 1867 1933 to investigate the sources of banking and financial panics we find that while a panic s exact starting date is unpredictable one can identify environments conducive to panics a lack of liquidity in financial markets seems to be a key source results also reveal the effectiveness of the aldrich vreeland act inelastizing the money supply and shortening the panic of 1914 and suggest that the panic of 1933 may have been caused by a speculative attack on the gold backed us dollar via the banks as opposed to a run on the banks directly

financing banking crises abstract a model of strategic asset pricing is used to investigate the increase in interest rates and the formation of cash syndicates that can occur during privately financed banking crises results produced help to explain the federal reserve system s creation following the panic of 1907 and to clarify the fed s role in financing contemporary banking crises

runs versus lemons information disclosure and fiscal capacity we study the optimal use of disclosure and fiscal backstops during financial crises providing information can reduce adverse selection in credit markets but negative disclosures can also trigger inefficient bank runs in our model governments are thus forced to choose between runs and lemons a fiscal backstop mitigates the cost of runs and allows a government to pursue a high disclosure strategy our model explains why governments with strong fiscal positions are more likely to run informative stress tests and paradoxically how they can end up spending less than governments that are more fiscally constrained

when does learning in games generate convergence to nash equilibria the role of supermodularity in an experimental setting this study clarifies the conditions under which learning in games produces convergence to nash equilibria in practice previous work has identified theoretical conditions under which various stylized learning processes achieve convergence one technical condition is supermodularity which is closely related to the more familiar concept of strategic complementarities we experimentally investigate the role of supermodularity in achieving convergence through learning using a game from the literature on solutions to externalities we systematically vary a free parameter below close to at and beyond the threshold of supermodularity to assess its effects on convergence we find that supermodular and near supermodular games converge significantly better than those far below the threshold from a little below the threshold to the threshold the improvement is statistically insignificant within the class of supermodular games increasing the parameter far beyond the threshold does not significantly improve convergence simulation shows that while most experimental results persist in the long run some become more pronounced

banks and loan sales marketing nonmarketable assets theories of financial intermediation predict that bank loans should not be marketable because of moral hazard problems banks will not conduct credit risk analysis or monitor borrowers if they are not at risk for failing to perform these services throughout most of history bank loans have not in fact been marketable yet by the end of the 1980 s the amount of commercial and industrial loan sales outstanding had grown to over 250 billion from trivial amounts at the beginning of the decade to explain the opening of this loan sales market we present a model of incentive compatible loan sales that allows for implicit contractual features between loan sellers and loan buyers we then test for the presence of these features using a sample of over 800 recent loan sales

local banking panics of the 1920s identification and determinants abstract using a newly discovered dataset of u s bank suspensions from 1921 to 1929 we discovered that banking panics were more common in the 1920s than had been believed besides identifying panics we investigate their determinants finding that local banking panics were more likely when fundamental economic conditions were generally weak and more likely in overbanked states they were less likely in states with deposit insurance or states where a relatively large share of banks belonged to chain banking organizations

optimal financial crises empirical evidence suggests that banking panics are related to the business cycle and are not simply the result of sunspots panics occur when depositors perceive that the returns on bank assets are going to be unusually low we develop a simple model of this in this setting bank runs can be first best efficient they allow efficient risk sharing between early and late withdrawing depositors and they allow banks to hold efficient portfolios however if costly runs or markets for risky assets are introduced central bank intervention of the right kind can lead to a pareto improvement in welfare from the earliest times banks have been plagued by the problem of bank runs in which many or all of the bank s depositors attempt to withdraw their funds simultaneously because banks issue liquid liabilities in the form of deposit contracts but invest in illiquid assets in the form of loans they are vulnerable to runs that can lead to closure and liquidation a financial crisis or banking panic occurs when depositors at many or all of the banks in a region or a country attempt to withdraw their funds simultaneously prior to the twentieth century banking panics occurred frequently in europe and the united states panics were generally regarded as a bad thing and the development of central banks to eliminate panics and ensure financial stability has been an important feature of the history of financial systems it has been a long and involved process the first cerntral bank the bank of sweden was established more than 300 years ago the bank of england played an especially important role in the development of effective stabilization policies in the eighteenth and nineteenth centuries by the end of the nineteenth century banking panics had been eliminated in europe the last true panic in england was the overend gurney company crisis of 1866

bank suspension of convertibility abstract a banking panic occurs when depositors at all banks seek a large reduction in their deposit holdings suspension of convertibility of demand deposits into currency was the banking system s response to a banking panic when depositors are incompletely informed about the state of bank investments a panic can occur when depositors expect capital losses conditional on having observed noisy indicators of the state of bank investments banks with superior information about the investments can signal to depositors by suspending convertibility that continuation of the long term investments is mutually beneficial

boom and bust patterns in the adoption of financial innovations we develop a dynamic model of the adoption of financial innovations each period firms decide whether or not to adopt an innovation of uncertain value and the profitability of each period s adoptions reveals information about the innovation s value we show that characteristics of financial innovation waves cited by critics as evidence of irrational excess are in fact consistent with fully rational behavior we also show that social welfare is enhanced when more firms adopt innovations of questionable value and that financial intermediaries base an incentive to encourage such adoption article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

bank run psychology abstract banks are inherently susceptible to panics and bank runs due to the problem of maturity mismatch resulting in both a stable equilibrium in which the bank survives and an unstable equilibrium in which a bank run occurs understanding equilibrium selection in this setting is extremely important for safeguarding financial stability in this paper one new potential factor that determines whether a bank runs gets triggered or not is experimentally studied namely the psychological state of the depositor prior to participating in an experimental bank run game subjects are either induced with fear sadness or happiness using an autobiographical emotion induction task the findings suggest that the presence of background fear significantly increases the likelihood of withdrawal and a subsequent bank run in addition women are shown to be significantly more likely to withdraw then men but only in the fear induction treatment

bank runs the deposit currency ratio and the interest rate abstract this paper provides a model of an economy with a banking system which is subject to bank runs the model is then used to explain the rise in short term interest rates during bank runs and the fall in the deposit currency ratio in anticipation of possible runs

using referendum data to characterize public support for purchasing development rights to farmland an econometric model that de scribes public support for farmland preservation programs as a function of local land use pat terns and socioeconomic data is developed two versions of the model are estimated using data from referenda conducted in pennsylvania and rhode island during 1982 through 1990 results suggest that support for referenda that purchase development rights is stronger in counties and towns with both rapidly increasing population and where land and house values have increased at higher rates environmental factors such as the prevalence of resource sensitive lands are also significant in describing the public s moti vation to preserve farmland jel q15

self fulfilling early contracting rush in markets for entry level professionals the insurance motive drives some participants to sign early contracts the rush to early contracting can be self fulfilling as both its effect on expectations about demand supply balance in the subsequent spot market and the effect on it from changes in the demand supply balance can be nonmonotone matching markets with more risk averse participants a greater uncertainty regarding relative supply of positions or a more polarized distribution of applicant qualities are more vulnerable to self fulfilling early contracting rushes employers can have a collective interest in preventing early offers to a few promising applicants from starting the rushes

regulatory reform in european banking abstract a stylized model of the role of banks in a context of imperfect financial markets where the potential for market failure exists is proposed the specificity of banking is analyzed and the need of regulation explained the study of regulatory responses highlights the importance of their associated side effects particular attention is devoted to the interaction of regulation and competition in a strategic context the effects of deregulation and european integration of financial markets on banking competition are dealt with in the proposed framework

deposit competition and financial fragility evidence from the us banking sector preliminary and incomplete please do not cite without permission we develop and estimate an empirical model of the u s banking sector using a new data set covering the largest u s banks over the period 2002 2013 our model incorporates insured depositors and run prone uninsured depositors who have rich preferences over dierentiated banks banks compete for deposits in the spirit of matutes and vives 1996 and can endogenously default we estimate demand for uninsured

fair value disclosures by bank holding companies abstract this paper examines the value relevance of fair value data disclosed under sfas 107 by banks for 1992 and 1993 collectively the evidence suggests differences between fair and book values of financial instruments are associated with market to book ratios however fair value disclosures for financial instruments other than securities are value relevant only in limited settings in addition only in 1992 are fair value variables associated with market to book ratios after incorporating existing historical cost information further analysis suggests the weaker 1993 results are not necessarily due to increased measurement error in fair value numbers

the interplay between forward looking measures and target setting we examine whether financial targets are based on both forward looking and financial information rather than on financial information only we collect sales and performance appraisal data of store managers in a retail chain the firm issues directives focused on the provision of excellent customer service and assesses store managers compliance with these directives subjectively we demonstrate that controlling for current sales compliance with directives scores predicts future sales performance we find that next to objective sales information this forward looking information is impounded in the next year s sales target finally we find some evidence that suggests that incorporating forward looking information improves the accuracy of sales targets this paper was accepted by mary barth accounting

contagious bank failures in a free banking system this paper develops a model of an unregulated banking system based around a private clearing house arrangement whilst such a system may dominate one with a public safety net in reducing moral hazard in lending and therefore the scope for individual bank insolvency it also increases the likelihood of contagious bank failures following a systemic shock or an aggregate liquidity shortage

bank runs and currency run in a system without a safety net argentina and the tequila shock abstract this paper tests the random withdrawals vs informed based theories of bank runs in the context of the bank panic that took place in argentina as a consequence of the mexican devaluation of december 20 1994 this evidence is unique in several ways it is the case of a contemporary banking system with virtually no explicit safety net a currency board with no deposit insurance scheme and a case in which the bank runs were triggered by a currency run the findings of the paper provide support to the informed based theories and show that depositors are concerned with the impact of a currency run on bank solvency

financial fragility liquidity and asset prices we define a financial system to be fragile if small shocks have disproportionately large effects in a model of financial intermediation we show that small shocks to the demand for liquidity cause either high asset price volatility or bank defaults or both furthermore as the liquidity shocks become vanishingly small the asset price volatility is bounded away from zero in the limit economy with no shocks there are many equilibria however the only equilibria that are robust to the introduction of small liquidity shocks are those with non trivial sunspot activity

an accurate measurement of the crowd out effect income effect and price effect for charitable contributions in the past empirical research on charitable contributions has focused on two issues estimating the income and price elasticities of contributions and estimating the extent to which government funding crowded out private contributions the two fundamental problems in all these studies are the differences in the underlying conceptual models and the use of imperfect data for empirical analysis this paper addresses both of these problems

basel iii leverage ratio requirement and the probability of bank runs abstract a new argument for the basel iii leverage ratio requirement is proposed the need to limit the risk of a bank run when there is imperfect information on the value of a bank s assets in addition to screening and monitoring borrowers banks provide liquidity insurance with the supply of short term deposits withdrawable on demand the maturity mismatch creates the risk of a disorderly bank run which can be exacerbated by imperfect information about the value of bank assets it is shown in a stylized basel iii framework that capital regulation should incorporate a liquidity risk component credit risk diversification and or a reduced probability of loan default which lead to a reduction of basel iii regulatory capital will increase the probability of a bank run the leverage ratio rule puts a floor on the basel iii risk weighted capital ratio allowing the limitation of such a risk

good booms bad booms credit booms usually precede financial crises however some credit booms end in a crisis bad booms and others do not good booms we document that while all booms start with an increase of total factor productivity tfp and labor productivity lp such growth falls much faster subsequently for bad booms we then develop a simple framework to explain this firms finance investment opportunities with short term collateralized debt if agents do not produce information about the collateral quality a credit boom develops accommodatingfirms with lower quality projects and increasing the incentives of lenders to acquire information about the collateral eventually triggering a crisis when the average quality of investment opportunities also grows the credit boom may not end in a crisis because the gradual adoption of low quality projects is not strong enough to induce information about collateral finally we also test the main predictions of the model

bank runs in the free banking period free banks in the united states issued private banknotes without discretionary restriction of entry previous research suggests explanations for noteholders relatively large losses and the substantial number of banks that closed the authors examine these hypotheses and the hypothesis that contagious runs were important the evidence provides no support for the importance of wildcat banking due to par versus market valuation of bond reserves episodic but not general support for the importance of declining bond prices and support for contagion effects and contemporaries knowledge of them with little or no impact on the number of banks that closed copyright 1994 by ohio state university press

illiquidity component of credit risk we describe and contrast three dierent measures of an institu tion s credit risk insolvency risk is the conditional probability of default due to deterioration of asset quality if there is no run by short term creditors total credit risk is the unconditional probability of default either because of a short term creditor run or long run asset insolvency illiquidity risk is the dierence between the two i e the probability of a default due to a run when the institution would otherwise have been solvent we discuss how the three kinds of risk vary with balance sheet composition we provide a formula for illiquidity risk and show that it is i decreasing in the liquidity ratio the ratio of realizable cash on the balance sheet to short term liabilities ii increasing in the outside option ratio a measure of the opportunity cost of the funds used to roll over short term liabil ities and iii increasing in the fundamental risk ratio a measure of ex post variance of the asset portfolio

on the welfare equivalence of asset markets and banking in diamond dybvig economies why do people choose bank deposit contracts over a direct participation in asset markets in their seminal paper diamond and dybvig s 1983 answer this question by claiming that bank deposit contracts can implement allocations that are welfare superior to asset markets equilibria the present paper demonstrates that this claim is false whenever the asset market participants are highly rational

dynamic debt runs we develop a dynamic model of debt runs on a rm which invests in an illiquid asset by rolling over staggered short term debt contracts i e dierent contracts mature at dierent times we derive a unique threshold equilibrium in which creditors coordinate their asynchronous rollover decisions based on the rm s publicly observable and time varying fundamental the coordination problem ampli es the creditors concerns about the rm s future rollover risk created by its time varying fundamental and causes each maturing creditor to run ahead of others even when the current fundamental is substantially higher than its liability our model provides a set of implications on the roles played by volatility illiquidity and debt maturity in driving debt runs as well as on rms capital adequacy standards and credit risk

bank panics suspensions and geography some notes on the contagion of fear in banking bank panics suspensions and geography some notes on the contagion of fear in banking recent attempts to understand bank panics tend to emphasize informational asymmetries or the possibilities of multiple equilibria such approaches stand in contrast to historical research that emphasizes legal factors influencing the organization of the banking system this paper constructs a model of a banking system operating under regulations similar to those in effect under the national banking system and in which information is complete in all other respects the model resembles that of diamond and dybvig 1983 the results indicate that given the regulatory environment it would have been surprising if suspensions of convertibility had not recurred periodically i introduction traditional explanations of panics under the national banking system 1863 1913 offered both by scholars and contemporaries stressed three factors 1 limitations on branching created incentives for the development and heavy use of correspondent banking relations 2 regulations favored holding interbank deposits with a relatively small group of new york banks this concentrated the reserves of the banking system in one location guaranteeing that heavy withdrawals of interbank balances from any source would affect new york banks and through them the entire banking system 3 legal restrictions prevented banks especially those holding large interbank deposits from adjusting interest rates in order to protect those deposits during periods of heavy withdrawal demand 1 this traditional explanation of the periodic recurrence of panics which emphasizes the organization of the banking system stands in marked contrast to more recent theories of panics which tend to focus on various informational asymmetries between banks and depositors 2 most of the recent literature on panics follows diamond and dybvig 1983 in modelling banks as a mechanism for pooling liquidity risks faced by depositors more specifically potential depositors can invest in the same primary assets available to banks however primary assets are costly to liquidate and depositors face random future liquidity needs at the time they make their investment decisions in such a framework the role of banks is to create and issue liabilities more liquid than their assets this activity provides insurance to depositors against random liquidity needs in diamond and dybvig s paper exogenous shocks to agents liquidity preference motivate withdrawal demand contracts between banks and depositors allow agents with liquidity needs to liquidate deposits at a lower cost than would be incurred in liquidating the primary asset however for each withdrawal due to inopportune liquidity needs a bank must liquidate primary assets and bear these costs hence the provision of liquidity by banks is feasible only if withdrawal demand is restricted to those actually requiring liquidity in the model of diamond and dybvig 3 panics can occur because the liquidity needs of individuals are private information in particular banks are assumed to be unable to observe whether any individual needs liquidity and hence cannot limit payments to individuals who actually need to withdraw funds banks are thus subject to runs as the result of self fulfilling prophecies if all depositors fear a run and they all seek to withdraw it will not be feasible for the banking system to provide liquidity to all of them thus the banking system must either suspend payments or be rendered insolvent of course a crucial component of this reasoning is that banks cannot distinguish legitimate from panic motivated withdrawals and hence cannot ration funds on this basis this model of panics provides no role for the organization of the banking system it therefore suggests that different countries or different regulatory regimes within the same country should have similar histories with respect to panics so long as they had similar deposit insurance schemes and similarly behaving lenders of last resort

assessing empirical research in managerial accounting a value based management perspective this paper applies a value based management framework to critically review empirical research in managerial accounting this framework enables us to place the exceptionally diverse set of managerial accounting studies from the past several decades into an integrated structure our synthesis highlights the many consistent results in prior research identifies remaining gaps and inconsistencies discusses common methodological and econometric problems and suggests fruitful avenues for future managerial accounting research

coordination failures and the lender of last resort was bagehot right after all the classical doctrine of the lender of last resort lolr elaborated by bagehot 1873 asserts that the central bank should lend to illiquid but solvent banks under certain conditions several authors have argued that this view is now obsolete in modern interbank markets a solvent bank cannot be illiquid this paper provides a possible theoretical foundation for rescuing bagehot s view our theory does not rely on the multiplicity of equilibria that arises in classical models of bank runs we built a model of banks liquidity crises that possesses a unique bayesian equilibrium in this equilibrium there is a positive probability that a solvent bank cannot find liquidity assistance in the market we derive policy implications about banking regulation solvency and liquidity ratios and interventions of the lender of last resort furthermore we find that public bailout and private bail in involvement are complementary in implementing the incentive efficient solution and that bagehot s lender of last resort facility must work together with institutions providing prompt corrective action and orderly failure resolution finally we derive similar implications for an international lender of last resort ilolr jel g21 g28

bank failure contagion in historical perspective abstract bank failures are contagious due to the lack of bank specific information depositors who lack financial information on individual banks make withdrawal decisions based on the condition of the banking system as a whole a high ratio of bank failures then signals an adverse condition within the banking sector and triggers systemwide bank runs this paper looks at bank panics in u s history and shows the importance of solvency information specific to individual banks the major empirical finding is that the government or banks stopped bank panics mainly by providing financial information on banks

equilibrium bank runs we analyze a banking system in which the class of feasible deposit contracts or mechanisms is broad the mechanisms must satisfy a sequential service constraint but partial or full suspension of convertibility is allowed consumers must be willing to deposit ex ante we show by examples that under the so called optimal contract the postdeposit game can have a run equilibrium given a propensity to run triggered by sunspots the optimal contract for the full predeposit game can be consistent with runs that occur with positive probability thus the diamond dybvig framework can explain bank runs as emerging in equilibrium under the optimal deposit contract

the political economy of branching restrictions and deposit insurance a model of monopolistic competition among small and large banks this article suggests that the introduction of bank branching restrictions and federal deposit insurance in the united states likely was motivated by political considerations specifically we argue that these restrictions were instituted for the benefit of the small unit banks that were unable to compete effectively with large multiunit banks we analyze this political hypothesis in two steps first we use a model of monopolistic competition between small and large banks to examine gains to the former group from the introduction of branching restrictions and governmentsponsored deposit insurance we then find strong evidence for the political hypothesis by examining the voting record of congress

an experimental exploration of self fulfilling banking panics their occurrence persistence and prevention this article tests the possibility and the degree of persistence of self fulfilling banking panics through an experimental protocol panics are proved to be persistent phenomena that are difficult to prevent however it seems possible to curb them through a learning effect caused by a temporary but sufficient suspension of the deposit availability combined with a narrow banking solution which makes banks more liquid additionally panic prevention requires a full deposit coverage to be effective this suggests that the moral hazard issue should not be tackled through a lower deposit coverage especially in emerging countries banking systems where depositors are likely to lose confidence

on the international harmonization of bank regulation this paper offers a three way typology of bank regulation and examines the question of international harmonization for each category for economic regulation the danger is that harmonization could support and preserve domestic protectionist regulatory regimes but it could instead be a beneficial guise for lowering protectionist barriers the latter efforts should be encouraged for prudential regulation national regulation should be adequate to handle the extra stresses of international banking harmonization efforts e g the basle accord may offer only modest help but the accord may offer indirect help by limiting national governments competitive efforts implicitly to subsidize their banks risk taking activities finally for information regulation national regulation appears to be adequate and international harmonization does not appear to be necessary copyright 1994 by oxford university press

bailouts and financial fragility how does the belief that policymakers will bail out investors in the event of a crisis affect the allocation of resources and the stability of the financial system i study this question in a model of financial intermediation with limited commitment when a crisis occurs the efficient policy response is to use public resources to augment the private consumption of those investors facing losses the anticipation of such a bailout distorts ex ante incentives leading intermediaries to choose arrangements with excessive illiquidity and thereby increasing financial fragility prohibiting bailouts is not necessarily desirable however it induces intermediaries to become too liquid from a social point of view and may in addition leave the economy more susceptible to a crisis a policy of taxing short term liabilities in contrast can correct the incentive problem while improving financial stability

private provision of a public good land trust membership land trusts prevent the development of open space providing both public and impure public goods to area residents this study examines the relationship between these benefits and membership levels for a sample of 91 land trusts while controlling for local demographic and area characteristics trusts that offer member only access to property have higher membership but most trusts do not provide such benefits membership increases with local population but at a decreasing rate consistent with the free riding behavior found in other studies of collective action the study finds the existence of scope effects with respect to the amount of protected acreage

could making banks hold only liquid assets induce bank runs abstract restrictions placed on bank portfolios are analyzed in a banking model designed to capture the role of checking accounts in facilitating transactions forcing banks to hold only liquid assets creates the incentive for liquidity based runs even when a run does not occur welfare is reduced as a result of overinvestment in the liquid asset

the fragility of short term secured funding markets abstract this paper develops an infinite horizon model of financial institutions that borrow short term and invest in long term assets that can be traded in frictionless markets because these financial intermediaries perform maturity transformation they are subject to potential runs we derive distinct liquidity collateral and asset liquidation constraints which determine whether a run can occur as a result of changing market expectations we show that the extent to which borrowers can ward off an individual run depends on whether it has sufficient liquidity collateral and asset liquidation capacity these determinants depend on the borrower s endogenous balance sheet and on exogenous fundamentals systemic runs are possible if shocks to the valuation of collateral held by outside investors are sufficiently strong and uniform and if the system as a whole is exposed to high short term funding risk the theory has policy implications for prudential regulation and lender of last resort interventions

information based contagion and the implications for financial fragility abstract this paper explores a global game model of information based financial contagion by revealing information on a common fundamental factor and thereby affecting the behavior of creditors the failure of a single firm can trigger the failure of another firm the model provides a unique equilibrium framework to assess the consequences of contagion and yields some hitherto unnoticed insights while contagion increases the correlation among the financial failures of different firms its impact on the incidence of failure is ambiguous i consider an analytically tractable version of the model in which the effect on the ex ante failure probabilities is exactly zero moreover the impact of contagion increases with the relevance of a common underlying fundamental but is limited to firms near the brink of success or failure

market rate versus fixed rate demand deposits abstract in an economy with uninsured banks market rate deposits are shown to provide services identical to fixed rate deposits without risking banking panics as long as there is not both aggregate uncertainty about liquidity demands and asymmetric information about bank asset quality however if both factors are present then the preferred deposit form depends on the riskiness of bank assets and information revealed through market prices the analysis may explain the evolution of fixed rate deposits before the introduction of deposit insurance moreover it provides currently relevant insights regarding deposit contract forms and deposit insurance