I develop a dynamic model of bank runs that allows me to study important phenomena such as the role of information externalities and herd behavior of depositors as a source of bank runs. I show that eliminating bank runs completely, even they can be generated by herd behavior of depositors, has...

As the number of bank failures increases, the set of assets available for acquisition by the surviving banks enlarges but the total amount of available liquidity within the surviving banks falls. This results in 'cash-in-the-market' pricing for liquidation of banking assets. At a sufficiently...

While the too-big-to-fail guarantee is explicitly a part of bank regulation in many countries, this paper shows that bank closure policies also suffer from an implicit too-many-to-fail problem: when the number of bank failures is large, the regulator finds it ex-post optimal to bail out some or...

We show that limited liability can induce profit-maximizing bank owners to herd with other banks. When bank loan returns have a systematic factor, the failure of one bank conveys adverse information about this systematic factor and increases the cost of borrowing for the surviving banks relative...

We show that the likelihood of information contagion induces profit-maximizing bank owners to herd with other banks. When bank loan returns have a common systematic factor, the cost of borrowing for a bank increases when there is adverse news on other banks, since such news, in turn, conveys...

While the too-big-to-fail guarantee is explicitly a part of bank regulation in many countries, this paper shows that bank closure policies also suffer from an implicit too-many-to-fail problem: when the number of bank failures is large, the regulator finds it ex-post optimal to bail out some or...

We present a model that can explain a sudden drop in the amount of money that can be borrowed against an asset, even in the absence of asymmetric information or fears about the value of the collateral. Three features of the model are essential: (i) the debt has a much shorter tenor than the...

We consider liquidity transfers between banks through the inter-bank borrowing and asset sale markets when banks providing liquidity may have market power and assets may be bank-specific. We show that when the outside options of liquidity-affected banks are weak, surplus banks may strategically...

We study liquidity transfers between banks through the interbank borrowing and asset sale markets when (i) surplus banks providing liquidity have market power, (ii) there are frictions in the lending market due to moral hazard, and (iii) assets are bank-specific. We show that when the outside...

This paper presents an experimental investigation of the factors that affect the dynamics and severity of bank runs. Our experiments demonstrate that the more information laboratory economic agents can expect to learn about the crisis as it develops, the more willing they are to restrain...