Dynamic Bank Runs

Abstract

We develop a dynamic model of bank runs. A bank \u85nances its long-term investment by rolling over short-term debts with a continuum of creditors, whose contract periods are asynchronous. In deciding whether to roll over the debt, each creditor faces the future rollover risk of the bank with other creditors, i.e., the bank fundamental could fall during his contract period, causing other maturing creditors to withdraw money and forcing the bank to liquidate its asset prema-turely. Di¤erent from the static bank-run models with multiple equilibria, we derive a unique monotone equilibrium, in which creditors coordinate their asyn-chronous rollover actions based on observable fundamental shocks. Our model captures a central element of the ongoing \u85nancial crisiseven in the absence of any fundamental deterioration, uctuations in the capital markets such as small changes in the volatility and liquidation value of the bank asset, because of their roles in determining the banks future rollover risk, could trigger preemptive runs by creditors on a solvent bank

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