Exogenous Shocks, Deposit Runs and Bank Soundness: A Macroeconomic Framework
IMF Working Papers, July 1, 1997
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- Exogenous Shocks, Deposit Runs and Bank Soundness: A Macroeconomic Framework
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Bibliographic details
- Authors: Mario I. Bléjer
- Published: July 1, 1997
- Series: IMF Working Papers
Summary of model and mechanisms
- All banks are initially solvent; an exogenous shock undermines confidence and triggers a flight from deposits into domestic and foreign currency.
- Real interest rates increase unexpectedly, adversely affecting firms and raising the share of banks’ nonperforming assets.
- The rise in nonperforming assets generates genuine solvency problems and accelerates bank runs.
- A devaluation is shown to have little positive impact on containing the bank run or insolvency.
Policy simulations and findings
- Compensatory monetary policy (increasing currency supply when deposits fall):
- Mitigates the bank run.
- Causes inflation and external imbalances.
- Combining compensatory monetary policy with tight fiscal policies:
- Slows the bank run.
- Mitigates insolvency.
- Achieves these outcomes at a lower macroeconomic cost than compensatory monetary policy alone.
Subject areas and keywords
- Subjects: Bank deposits, Bank solvency, Banking, Commercial banks, Financial institutions, Financial sector policy and analysis, Financial services, Government debt management, Monetary expansion, Monetary policy, Public financial management (PFM), Real interest rates.
- Keywords: bank, bank assets, bank category, bank default, bank depositor, bank management, Bank solvency, Commercial banks, deposit run, Government debt management, liquidity contraction, Monetary expansion, price level, Real interest rates, WP.
Content in this bundle
- Exogenous Shocks, Deposit Runs and Bank Soundness: A Macroeconomic Framework - WP/97/91