DP17621 Deposit and Credit Reallocation in a Banking Panic: The Role of State-Owned Banks

• Viral Acharya Abhiman Das Nirupama Kulkarni Prachi Mishra Nagpurnanand Prabhala
31 Oct 2022

We study a bank run in India in which private bank branches experience sudden and
considerable loss of deposits, which migrate to state-owned public sector banks (PSBs)
that serve as safe havens. We trace the consequences of the deposit reallocation using
granular bank-firm relationship and branch balance sheet data. The flight to safety is
not a flight to quality. Lending shrinks and credit quality improves at the run banks
but worsens at the PSBs receiving the flight-to-safety flows, especially the weaker
ones. The resource reallocation is inefficient in the aggregate.