Title: Bank runs and institutions
Description: "Governments typically respond to a run on the banking system by temporarily  freezing deposits and by rescheduling payments to depositors. Depositors may  even be required to demonstrate an urgent need for funds before being allowed  to withdraw. We study ex post efficient policy responses to a bank run and the ex  ante incentives these responses create. Given that a run is underway, the efficient  response is typically not to freeze all remaining deposits, since this would  impose heavy costs on individuals with urgent withdrawal needs. Instead,  (benevolent) government institutions would allow additional withdrawals,  creating further strain on the banking system. We show that when depositors  anticipate these extra withdrawals, their incentives to participate in the run  actually increase. In fact, ex post efficient interventions can generate the  conditions necessary for a self-fulfilling run to occur."--Federal Reserve Bank of Richmond web site.
Subjects: Bank deposits, Bank management