What Is a Bank Run?

Bank runs, also known as run-outs, refer to a large number of people gathered in a short period of time, withdrawals refer to withdrawals, and cashing out. Bank run refers to the phenomenon that a large number of bank customers go to the bank to withdraw cash at the same time. Bank runs are often caused by declining creditworthiness, rumors of bankruptcy, and other reasons that cause depositors to have doubts about the safety of savings in banks. When the run-up phenomenon occurs, if the bank's deposit reserve is insufficient to pay, it may cause the bank to fall into a liquidity crisis, and then go bankrupt.

Bank run

CCTV Sheyang March 26 news (Reporter Yang Shouhua Huang Chuanyan Intern reporter Dong Yan) According to the Voice of China "News and Events" report, on the evening of March 24, an online article about "Jiangsu Sheyang Rural Commercial Bank encountered nearly 1,000 people "Run cash" news became the focus of attention. It was reported that on the same day, Sheyang Rural Commercial Bank was located in a branch of Yancheng Environmental Protection Industrial Park, and encountered nearly a thousand people running cash, and the withdrawal team was queued out of the business hall.

The cause of the "run-on incident" was a rumor about "Sheyang Rural Commercial Bank is going to close down", which eventually led to Sheyang Rural Commercial Bank having to urgently take out a large amount of cash to guarantee the supply of cash. So far, the bank outlets are being restored order.

On the afternoon of the 24th, crowds crowded in front of the Qingyang branch of Jiangsu Sheyang Rural Commercial Bank in Qingfeng Village, Yancheng Environmental Protection Industrial Park, and many people were crowding into the business hall. Don't believe the rumors on the electronic screen in front of the bank. In the business hall, many police officers are maintaining order, and bank staff continue to use their horns to shout to the masses, urging everyone not to believe the rumors. ^[2]

Analysis of Bank Run

Bryant first explained theoretically the role that deposit insurance can play on runs in 1980, and explained the impact of random withdrawals, liability events, and asymmetric information caused by risk assets on the financial industry, taking into account the government Different methods such as tax adjustment and currency issuance can be used to protect deposits, Bryant analyzed their different efficiencies, effects and costs.

Diamond and Dybvig proposed an equilibrium model based on the research results of Bryant in 1983. That is, there are multiple equilibrium states in the banking industry, and the role of deposit insurance is that its appearance eliminates the balance of bank runs and leaves a healthy balance without runs. The model assumes that there are three periods (T = 0, 1, 2) and one commodity. Each party has

Bank run

With the same production technology, 1 unit is invested in period 0, 1 unit is produced at the end of period 1, and R> 1 is produced at the end of period 2. This means that interrupting production is costly. It is also assumed that all consumers are the same at time 0 and are not sure when they consume. But in period 1 you can choose to be a first or second class. The first type of person is only concerned about consumption in period 1 and the probability of occurrence is t; the second type of person is only concerned about consumption in period 2 and the probability of occurrence is (1-t). Let CT denote the consumption of a certain party during T, each person has a unit endowment. In the case of complete information, the consumption of the first period of people is 1 and 0 respectively; the consumption of the second period of people is 0 and R respectively.

The bank absorbs deposits, invests in the production process, and promises a reasonable return to the depositor who withdrew in period 1. As long as there are uncleared assets, they promise to pay the queued withdrawals r1 => 1. "Sequential service constrains" is an important condition in this model. It means that depositors arrive at the bank to withdraw randomly, and bank payment depends only on the position of the party in the withdrawal team. Later people may face a situation where there is no money to withdraw. If there are remaining assets after the first withdrawal, it will be evenly distributed among depositors. On the one hand, it is similar to some kind of debt, and if the bank is not bankrupt, it is fixed. Income; on the other hand, if the bank goes bankrupt, there is no fixed income, and the depositor has some kind of residual claim at T = 2, which makes it like a financial instrument with a mixture of debt and equity. Under this contract There are two kinds of equilibrium, one is run-on equilibrium, and the other is benign optimal sharing equilibrium.

Bank run

Diamond and Dybvig believe that anything that causes depositors to expect a run will cause the run to happen realistically, regardless of the soundness of the bank itself. Banks must therefore pay special attention to maintaining the confidence of depositors. Knowing the proportion of the first class of people at T = 1, the use of "termination of exchange" can ensure the realization of optimal conditions and eliminate bank runs. However, if t is a random variable, the "current deposit contract" is no longer optimal. Diamond and Dybvig believe that appropriate government intervention is necessary at this time, and the deposit insurance system can eliminate panic and prevent run-ups. The key to this model is that the government uses deposit insurance as a tool to prevent run balances.

Bank run

In the case of deposit insurance, the equilibrium state of running runs is eliminated, so that both types of people can get the best consumption and achieve a healthy equilibrium. However, its premise is that the government must collect the optimal tax. If T is random and the tax collected by the government is not the optimal amount, then tax distortions will occur in the implementation of government deposit insurance, plus the cost problem in the implementation process. There may be a decline in social welfare.

Diamond and Dybvig illustrate the nature of banks' poor immunity to runs and the savings contracts provided by banks. From the perspective of social welfare, the cost of bank runs is quite high. If a bank fails, it will have to recover all deposits. This will have two negative effects. Terminating productive investment destroys the most among depositors. Optimal risk sharing. On the other hand, if bank runs occur, the collapse of the currency system and other economic problems will arise.

Deposit insurance can effectively prevent run-out balance because bank contracts are optimized so that late consumer depositors do not participate in runs. In general, the mechanism of government deposit insurance is to remove one of the "bad equilibriums", the run-off equilibrium, without changing the original equilibrium, thereby ensuring the normal operation of the bank.

Based on the run model of Diamond and Dybvig, Gibbons proposed a game model with complete but imperfect information. Consider two investors, each with another deposit in a bank. Banks invest their deposits in long-term projects. If the bank is forced to liquidate before the project expires, it will recover the total amount of funds, and if the bank's investment is allowed to expire, the total project income will be It is set before the maturity of the deposit and after the maturity of the deposit. In period 1, if both depositors make a withdrawal, each person gets it, and the game ends; if only one investor makes a withdrawal, the investor gets it, and the other one gets it, the game ends; if both depositors postpone to the second period Withdraw, everyone gets, the game is over. For simplicity, write the two phases into the same matrix. It can be seen that two pure strategy Nash equilibriums may occur, namely (withdrawal, withdrawal) and (without withdrawal). , Not withdrawing funds), although, in this game, there is no mechanism to ensure that the latter equilibrium will appear at that time, so it is a mixed strategy problem.