Managing Confidence in Emerging Market Bank Runs

December 1, 2004

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Ashoka Mody, and Se-Jik Kim. Managing Confidence in Emerging Market Bank Runs, (USA: International Monetary Fund, 2004) accessed September 19, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

In a rational-expectations framework, we model depositors' confidence as a function of the probability of future bank bailouts. We analyze the effect of alternative bank bailout policies on depositors' confidence in an emerging market setting, where liquidity shortages of banks are revealed sequentially and governments cannot credibly commit to bailing out all potentially distressed banks. Our findings suggest that allowing early bank failures and using available liquidity for credible commitments to later bailouts can better boost confidence than early bailouts. This conclusion arises because with a high chance of liquidity shortage in the future, depositors may lose confidence and hence withdraw deposits even from potentially sound banks. Such a policy of late bailouts is likely to receive political support when a full bailout needs to be financed by taxation. The logic of late bailout remains valid even when banks may hide their distress or when closures of early distressed banks create contagion.

Subject: Asset and liability management, Bank bailouts, Banking, Blanket guarantee, Consumption, Financial crises, Financial regulation and supervision, Liquidity, Liquidity risk, National accounts

Keywords: Afternoon-shock bank depositor, Aggregate output, Bailout, Bailout path, Bailout policy, Bailout rate, Bailout ratio, Bank bailout, Bank bailouts, Bank runs, Blanket guarantee, Confidence, Consumption, Depositors consist, Early bailout, Interest rate, Late bailout, Liquidity, Liquidity risk, Liquidity shortage, Sequential liquidity shortages, WP

Publication Details

Pages:

29
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2004/235
Stock No:

WPIEA2352004
ISBN:

9781451875683
ISSN:

1018-5941

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