Bank runs, prudential tools and social welfare in a global game general equilibrium model

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 08 June 2018

Staff Working Paper No. 732
By Daisuke Ikeda

I develop a general equilibrium model that features endogenous bank runs in a global game framework. A bank run probability - systemic risk - is increasing in bank leverage and decreasing in bank liquid asset holdings. Bank risk shifting and pecuniary externalities induce excessive leverage and insufficient liquidity, resulting in elevated systemic risk from a social welfare viewpoint. Addressing the inefficiencies requires prudential tools on both leverage and liquidity. Imposing one tool only causes risk migration: banks respond by taking more risk in another area. I extend the model and study risk migration in other fields including sectoral lending, concentration risk and shadow banking.

PDFBank runs, prudential tools and social welfare in a global game general equilibrium model

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