Event date: 12 December
Learning in Bank Runs
By Eva Schliephake (University of Bonn)
Bank runs often begin with informed capital pulling money out and other investors trying to figure out whether to run. We examine a model in which investor learning exacerbates bank runs. Sophisticated investors can gather information and quickly withdraw when the quality of the bank’s assets are low. Less informed investors can panic or defer their withdrawal, which allows them to learn by observing informed investors’ actions. The (real) option to learn from previous withdrawals leads to costly liquidation in bad states, which increases the payo of running ex-ante.
Moreover, when more investors learn the bank’s asset quality early, remaining investors have a fear of missing out, which also makes pre-emptive runs more likely. More information may thus lead to more panic runs and welfare may be non-monotonic in the amount of information available.