How (Un-)Informed Are Depositors in a Banking Panic? A Lesson from History
How informed or uninformed are bank depositors in a banking crisis? Can depositors anticipate which banks will fail? Understanding the behavior of depositors in financial crises is key to evaluating the policy measures, such as deposit insurance, designed to prevent them. But this is difficult in modern settings. The fact that bank runs are rare and deposit insurance universal implies that it is rare to be able to observe how depositors would behave in absence of the policy. Hence, as empiricists, we are lacking the counterfactual of depositor behavior during a run that is undistorted by the policy. In this blog post and the staff report on which it is based, we go back in history and study a bank run that took place in Germany in 1931 in the absence of deposit insurance for insight.
How Has COVID-19 Affected Banking System Vulnerability?
Kristian Blickle, Matteo Crosignani, Fernando Duarte, Thomas Eisenbach, Fulvia Fringuellotti, and Anna Kovner The COVID-19 pandemic has led to significant changes in banks’ balance sheets. To understand how these changes have affected the stability of the U.S. banking system, we provide an update of four analytical models that aim to capture different aspects of banking system […]
Why Large Bank Failures Are So Messy and What to Do about It?
If the Lehman Brothers failure proved anything, it was that large, complex bank failures are messy; they destroy value and can destabilize financial markets.
Factors that Affect Bank Stability
Thomas M. Eisenbach and Tanju Yorulmazer In a previous Liberty Street Economics post, we introduced a framework for thinking about the risks banks face. In particular, we distinguished between asset return risk and funding risk that can interact and cause a bank to fail. In our framework, a bank can fail for two reasons: