Please use this identifier to cite or link to this item:
Matta, Rafael
Perotti, Enrico
Year of Publication: 
Series/Report no.: 
Tinbergen Institute Discussion Paper 16-087/IV
Can the risk of losses upon premature liquidation produce bank runs? We show how a unique run equilibrium driven by asset liquidity risk arises even under minimal fundamental risk. To study the role of illiquidity we introduce realistic norms on bank default, such that mandatory stay is triggered before all illiquid assets are sold. Since illiquid assets are not available in a run, asset liquidity risk has a concave effect on run incentives, quite unlike fundamental risk. Runs are rare when asset liquidity is abundant, become more frequent as it falls and decrease again under very low asset liquidity. The socially optimal demandable debt contract limits inessential runs by targeting a high rollover yield. However, the private choice minimizes funding costs, tolerating more frequent runs when illiquid states are sufficiently rare.
liquidity risk
bank runs
global games
demandable debt
mandatory stay
Document Type: 
Working Paper
Social Media Mentions:

Files in This Item:
509.79 kB

Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.