Category Archives: bank runs

Revised Riksbank WP 441 on the US Regional Banking Crisis

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“Bank fragility and risk management” with Toni Ahnert, Agnese Leonello, and Robert Marquez

  • Abstract: Shocks to banks’ ability to raise liquidity at short notice can lead to depositor panics, as evidenced by recent bank failures. Why don’t banks take a more active role in managing these risks? In a standard bank-run model, we show that risk management failures are most prevalent when exposures are more severe and managing risk would be particularly valuable. Bank capital and deposit insurance coverage act as substitutes for risk management on the intensive margin but as complements on its extensive margin, encouraging the adoption of risk management operations. We provide insights for the appropriate regulation of bank risk-management operations. (G01, G21, G23)
The figure shows the risk management intensity z* as a function of the interim asset value for two levels of bank capital: k and k’>k. We can see that banks fail to do any risk management when the interim asset value is low, and that risk management failures are facilitated by lower levels of bank capital.
  • Keywords: Banking crises, depositor withdrawals, asset valuations, risk management, global games.

New Riksbank Working Paper version of “A wake-up call theory of contagion”

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“A wake-up call theory or contagion” with Toni Ahnert (This version: 03/2020; First version: 06/2012)

  • Abstract: We offer a theory of contagion based on the information choice of investors after observing a financial crisis elsewhere. We study global coordination games of regime change in two regions with an unobserved common macro shock as the only link between regions. A crisis in the first region is a wake-up call to investors in the second region. It induces them to reassess the regional fundamental and acquire information about the macro shock. Contagion can occur even after investors learn that regions are unrelated (zero macro shock). Our results rationalize empirical evidence about contagious bank runs and currency crises after wake-up calls. We also derive other testable implications of the model. (D83, F3, G01, G21)
The value of information v and the proportion of informed investors n2 with and without a wake-up call, f ∈ {1, 0}. The figure shows (1) the strategic complementarity in information choices and (2) the effect of a higher level of s that increases the skewness of the macro shock and leads to an expansion of the intermediate range of information costs for which we establish the wake-up call contagion effect.