Discussion paper
DP19276 Savings, Efficiency and Bank Runs
Does the level of deposits affect bank fragility and efficiency? By augmenting a standard model of endogenous bank runs with a consumption-saving decision, we derive two key findings. First, depositors' incentives to run increase with the amount of savings held as bank deposits. Second, a saving externality emerges since individual depositors do not internalize the impact of their savings on the likelihood of a bank run. This leads to an economy featuring over-saving and inefficient bank liquidity provision, as well as excessive bank fragility. Finally, we characterize the optimal policy to implement the efficient allocation.
£6.00
