Bank Runs without Sequential Service
David Andolfatto and Ed Nosal
Working Paper 2018-6
Download the full text of this paper (265 KB)
Banking models in the tradition of Diamond and Dybvig (1983) rely on sequential service to explain belief-driven runs. But the run-like phenomena witnessed during the financial crisis of 2007–08 occurred in the wholesale shadow banking sector where sequential service is largely absent, suggesting that something other than sequential service is needed to help explain runs. We show that in the absence of sequential service runs can easily occur whenever bank-funded investments are subject to increasing returns to scale consistent with available evidence. Our framework is used to understand and evaluate recent banking and money market regulations.
JEL classification: G01, G21, G28
Key words: bank runs, increasing returns to scale, mechanism design
The authors thank conference participants at the second annual Missouri Macro Workshop; the 2017 Summer Workshop on Money, Banking, Payments, and Finance, at the Bank of Canada; the 2017 Canadian Macro Study Group in Ottawa; and seminar participants at the Federal Reserve Banks of Atlanta, Chicago, Cleveland and St. Louis, the National University of Singapore, Arizona State University, University of Hawaii, and Simon Fraser University. They owe special thanks to Todd Keister, whose comments on a prior draft led to a number of substantial improvements. The views expressed here are the authors' and not necessarily those of the Federal Reserve Banks of Atlanta and St. Louis or the Federal Reserve System. Any remaining errors are the authors' responsibility.
Please address questions regarding content to David Andolfatto, Federal Reserve Bank of St. Louis and Simon Fraser University, Research Division, P.O. Box 442, St. Louis, MO 63166-0442, 314-444-4714, firstname.lastname@example.org or Ed Nosal, Federal Reserve Bank of Atlanta, Research Department, 1000 Peachtree Street NE, Atlanta, GA 30309-4470, 404 498-6070, email@example.com.
Subscribe to receive e-mail notifications about new papers.