An Experiment on the Causes of Bank Run Contagions

Paper number: 12/06

Year: 2012

Paper Category: Discussion Paper

Authors

Surajeet Chakravarty,
Miguel A. Fonseca and Todd R. Kaplan

Abstract

To understand the mechanisms behind bank run contagions, we conduct bank run exper- iments in a modified Diamond-Dybvig setup with two banks (Left and Right). The banks' liquidity levels are either linked or independent. Left Bank depositors see their bank's liquidity level before deciding. Right Bank depositors only see Left Bank withdrawals before deciding. We find that Left Bank depositors' actions signi cantly affect Right Bank depositors' behav- ior, even when liquidities are independent. Furthermore, a panic may be a one-way street: an increase in Left Bank withdrawals can cause a panic run on the Right Bank, but a decrease cannot calm markets.

An Experiment on the Causes of Bank Run Contagions An Experiment on the Causes of Bank Run Contagions