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Lecture 6:
Bank Runs
Outline 2

0. Motivation

1. Economic Framework

2. In Practice
 Motivation
Problem: Runs on Financial Institutions and Asset Markets
have become a big problem in recent years 3
 Motivation 4
There are many questions we want to answer:
• How do banks work? What is the source of value that they
create?
• Why do bank runs occur? What is the fundamental
economic model at play?
• Are bank runs really that bad? If so, how do we deal with
them?

Can we answer these questions using intuition alone?

 Intuition is not very helpful for parsing this problem

Can we rely on statistical approaches to estimating discount rates?

 Statistics are also not very helpful here
Economic Approach
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Because intuition and statistics are not helpful in this context, we will use
economics to help guide us.

We will develop a theoretical framework to think about banks and bank runs.

We will then apply this framework in practical settings, to understand the

tools available to deal with bank runs, both ex-ante and ex-post.
Model of Banks
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 A bank is essentially a firm that raises funding in the form of short

term deposits, long-term debt, and equity.

 It takes these sources of capital, and invests in many assets such as

treasury securities, corporate loans, mortgages, personal loans, etc.
Model of Banks
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 A bank is essentially a firm that raises funding in the form of short

term deposits, long-term debt, and equity.

 It takes these sources of capital, and invests in many assets such as

treasury securities, corporate loans, mortgages, personal loans, etc.