Smooth Regulatory Intervention

In settings of runs on financial firms, policy makers have developed different forms of policy intervention for stopping, easing or preventing runs. This paper characterizes types of policy intervention that indeed lead to a lower run-propensity ex ante versus types that lead to preemptive behavior by investors and a higher run-propensity. I do so in a global games setting with very general payoffs which allows me to analyze a large set of regulatory interventions such as gradual withdrawal-contingent bailins, bailouts, withdrawal fees, suspension of convertibility, and lender of last resort emergency liquidity provision. I show that common intervention methods cause preemptive behavior via budget interdependence of different agent groups and I construct corrective regulatory countermeasures to fix disincentives caused by such intervention types