Exogenous Shocks, Deposit Runs and Bank Soundness: A Macroeconomic Framework
July 1, 1997
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Summary
In a model where all banks are initially solvent, an exogenous shock affects confidence, causing a flight from deposits into domestic and foreign currency. Real interest rates increase unexpectedly, affecting firms and raising the share of the banks’ nonperforming assets. This increase causes genuine solvency problems and accelerates the bank run. Policy simulations show that compensatory monetary policy (increasing currency supply when deposits fall) mitigates the bank run but causes inflation and external imbalances. Combining compensatory monetary policy with tight fiscal policies also slows the bank run and mitigates insolvency, but at a lower macroeconomic cost. A devaluation is shown to have little positive impact.
Subject: 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
Pages:
31
Volume:
1997
DOI:
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Issue:
091
Series:
Working Paper No. 1997/091
Stock No:
WPIEA0911997
ISBN:
9781451951738
ISSN:
1018-5941
