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Contagious bank runs and committed liquidity support
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Li, Zhao and Ma, Kebin (2022) Contagious bank runs and committed liquidity support. Management Science, 68 (12). pp. 9152-9174. doi:10.1287/mnsc.2021.4258 ISSN 0025-1909.
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Official URL: https://doi.org/10.1287/mnsc.2021.4258
Abstract
In a crisis, regulators and private investors can find it difficult, if not impossible, to tell whether banks facing runs are insolvent or merely illiquid. We introduce such an information constraint into a global-games-based bank run model with multiple banks and aggregate uncertainties. The information constraint creates a vicious cycle between contagious bank runs and falling asset prices and limits the effectiveness of traditional emergency liquidity assistance programs. We explain how a regulator can set up committed liquidity support to contain contagion and stabilize asset prices even without information on banks’ solvency, rationalizing some recent developments in policy practices.
Item Type: | Journal Article | ||||||||
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Subjects: | H Social Sciences > HB Economic Theory H Social Sciences > HG Finance |
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Divisions: | Faculty of Social Sciences > Warwick Business School > Finance Group Faculty of Social Sciences > Warwick Business School |
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Library of Congress Subject Headings (LCSH): | Bank failures, Financial crises, Bank liquidity | ||||||||
Journal or Publication Title: | Management Science | ||||||||
Publisher: | Institute for Operations Research and the Management Sciences (I N F O R M S) | ||||||||
ISSN: | 0025-1909 | ||||||||
Official Date: | December 2022 | ||||||||
Dates: |
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Volume: | 68 | ||||||||
Number: | 12 | ||||||||
Number of Pages: | 47 | ||||||||
Page Range: | pp. 9152-9174 | ||||||||
DOI: | 10.1287/mnsc.2021.4258 | ||||||||
Status: | Peer Reviewed | ||||||||
Publication Status: | Published | ||||||||
Access rights to Published version: | Restricted or Subscription Access | ||||||||
Copyright Holders: | INFORMS | ||||||||
Date of first compliant deposit: | 31 May 2022 | ||||||||
Date of first compliant Open Access: | 1 June 2022 | ||||||||
RIOXX Funder/Project Grant: |
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